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Lululemon Stock: A Good Long-Term Buy?

Lululemon Stock: A Good Long-Term Buy?

Based in Canada, Lululemon Athletica Inc. (NASDAQ: LULU) is one of the most popular Athleisure apparel and accessory companies in the world, operating 574 retail stores globally. 

However, given the surging inflation rates and decline in discretionary consumer spending, Lululemon’s financials have taken a hit lately. This has caused the Nasdaq-listed stock to plunge 23.37% year-to-date. 


Highly anticipated Q2 results

Lululemon released its fiscal second-quarter (ended in July) earnings report last week. It reported revenue of $1.9 billion, an increase of 29% year-over-year. 

Analysts expected the company’s revenues to rise 22% year-over-year to $1.77 billion in Q2. Due to share buybacks, LULU grew earnings by 33% to $2.2 per share, surpassing estimates of $1.86 in the July quarter. 

The retail giant opened 22 company-operated stores in Q2 and grew its total store count to 600 at the end of the July quarter. 

Going forward, the company’s profit margins will most likely take a hit due to the increased air freight costs amid continuing global supply chain disruption. Lululemon’s gross and operating margins declined sequentially in the fiscal first quarter, and this trend is expected to continue in the upcoming quarters.  


Lululemon and its ambitious growth plan 

Earlier in April, Lululemon announced its most aggressive growth plan to date, the Power of Three ×2 strategy. The company aims to double its 2021 total revenue to $12.50 billion by 2026 through improved product innovation, market expansion, and guest experience. It is currently targeting a total net revenue CAGR of 15% between 2021 and 2026. 

LULU opened two new stores and a local website in Spain in July, in line with its market expansion plans. Also, the company plans to multiply its 2021 international revenues four times by 2026 and double its men’s and digital revenues over this period. Moreover, the Chinese market is slated to play a major role in LULU’s five-year growth plan. 

Regarding this, LULU CEO Calvin McDonald said, “The success of our Power of Three formula in delivering on our 2023 growth strategy supports our goal to double the business over the next five years … We remain early in our growth journey, with our strong product engine, proven ability to create enduring guest relationships, and significant runway in core, existing, and new markets. Following our compelling track record of delivering against our goals, I am excited about taking our growth strategies to the next level to serve more and more guests around the world.”


Industry headwinds

Many analysts have reservations regarding the company’s ability to fulfill its growth targets. Jefferies analyst Randal Konik downgraded the stock to “Sell” last week, citing industry headwinds. 

This comes as major clothing retailers have reported a substantial “inventory overhang,” due to the 40-year high inflation rate. With apparel prices up 0.8% sequentially in June, major retailers have tremendous excess inventory in warehouses. As most people cut back on discretionary spending, overall apparel sales are expected to remain bleak. 

Konik expects LULU to downgrade its revenue guidance as the company navigates through the industry headwinds. The precarious Covid situation in China, resulting in multiple lockdowns, will most likely harm LULU’s sales in the country during the upcoming months. 

The bottom line

Lululemon is not the first company to feel the pinch of the volatile macroeconomic backdrop. Several high-end apparel companies, including Nordstrom (NYSE: JWN) and Macy’s (NYSE: M), had to reduce their retail prices in order to boost their inventory turnover. While Lululemon’s near-term growth prospects seem bright, the company might not be able to meet its five-year targets as the economic headwinds persist.

Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.

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