Lululemon CEO outlines the Power of Three x2 plan to investors – courtesy of lululemon analyst day presentation

Lululemon Athletica Inc. (NASDAQ: LULU) is undeniably one of the greatest apparel and retail growth stories in the last generation. After a 2007 IPO at $18, and after a 2-for-1 stock split in 2011, Lululemon rose about 50-fold by the end of 2023. The company could do no wrong. Investors rarely saw a 20% drop in the stock and its stock only fell 5 years of 17 full years of trading. And then 2024 arrived. Now the two best analogies involve wheels off the bus or trains jumping the tracks. Lululemon has now lost about half of its value from January to the end of August.

Being the greatest growth story of a generation in a sector is one thing. When massive growth companies transition to being valued as maturing companies, it can be an incredibly painful process for investors. It has been very painful for Lululemon investors. There are three serious macro headwinds that have hurt Lululemon and which are crushing its longer-term investors who have held on in 2024 — broad “Athleisure” segment weakness in apparel; price conscious consumers pinched after inflation; and every other brand having severe Lulu-envy with competitive product offerings at lower prices.

To make matters worse, LULU decided to pull its new Breezethrough leggings from shelves shortly after its launch in July. The company received too many complaints to ignore about Breezethrough’s unflattering fit. Lululemon sells a premium product, but the company is not a stranger to product issues. A decade ago the company pulled many of its yoga pants off shelves because of complaints that they were to sheer and quality complaints of pilling after just a few months of wear and about seams coming apart. The company fell into hot water on how it was communicating the issues.

Long-term investors in LULU have to be asking the biggest question of them all — can the good times ever return?

Tactical Bulls wants to give an unbiased 360-degree review of what Lululemon can or should reasonably expect going forward. A simple explanation would be just to expect slower growth from a maturing company. The harder answer for long-term investors is determining whether LULU stock is a buy… a sell… a hold… or an avoid. Be advised that Tactical Bulls is not making any recommendations or investment advice here. The ultimate decision to buy or sell (or to hold or avoid) is up to you and your financial advisor.

HOW IT STARTS

The long and short of the matter is that nothing has to last forever, not even bad news. The other side of the coin is that once issues like this happen newer investors should not realistically expect the growth of years’ past to ever be the same.

Analysts have had to downsize their expectations handily from even the start of this year. Lululemon now finds itself as an emerging “turnaround story” but is still not a “special situation” story that would be even more complicated. Many companies manage to turn around. Some do not.

The chart has shown severe damage with what may be its worst sell-off that investors can remember. Short sellers remain active.

As of the latest data available in the report, LULU said that it opened 10 net new company-operated stores in Q2 and it now has 721 stores in total (versus 271 Athleta stores). A breakdown of total stores in each region was not provided.

Lululemon is still actually growing. Where that growth is and how it looks ahead will have to be proven rather than just assumed. Here was LULU’s by-segment sales in constant currency reporting:

• U.S. traffic is flat;
• Canada up 11%;
• China up 35%;
• and “rest-of-the-world” up 27%.

Lululemon may have opened its mind to larger bodies and different body shapes compared to the past. Management took a lot of heat in the past after pointing out that some people just aren’t built to wear its clothes. This may not seem kind in a world where body affirmation seems to cheer and reward obesity, but Lululemon’s clothes just do not look good as good on people who are not in shape.

Now investors have to decide — stick it out… bail… avoid… time to buy… or buy more! Again, this is a decision for each investor that needs to be made with a financial advisor. Tactical Bulls is not issuing any recommendation on LULU or any of the companies mentioned herein.

WHAT OUTSIDERS ARE SAYING

Here is a brief synopsis without showing ratings and targets of how some outsiders are viewing the report:

• Jefferies says Lululemon’s brand and financial performance have peaked.
• JPMorgan believes that Lululemon’s organizational changes are expected to improve consistency in the U.S. market (and let’s just all admit that investors love consistency!).
• TheStreet said that Lululemon is fighting to keep the ‘it-girl’ title away from competition.
• William Blair’s report noted that Lululemon’s growth is now more of international story than in its home market in North America.
• CNBC’s headline — Lululemon cuts guidance, misses sales estimates after botched product launch

WHAT INSIDERS HAVE SAID

Calvin McDonald, CEO of Lululemon, pointed out directly that its slower sales in women’s apparel last quarter were from its own product plan instituted a year ago which frankly had “less newness across core and seasonal styles.”

McDonald also said:

“Looking ahead, we feel confident in the long runway in front of us as we execute on our Power of Three ×2 growth plan.”

CFO Meghan Frank did not exactly capture the longer-term pain being felt in her official statement. Her post said:

“Earnings per share exceeded our expectations in the second quarter, driven by better-than-expected gross margin expansion and disciplined execution. As we enter the back half of the year, we remain focused on executing on our near-term priorities, while strategically investing for long-term growth. I would like to thank our teams around the world for their commitment to lululemon.”

While this is not a quote, it was a significant change to the company at a time when it needs help. VF Corp. (NYSE: VFC) had recently hired away LULU’s former chief product officer. The WSJ recently reported that “cheaper dupes” are just as popular with buyers looking for discounts.

And Gap Inc. (NYSE: GAP) has its own competing brand of Athleta along with fresh strong endorsements after the Olympics. Its report was issued the same time as LULU and Gap reported that Athleta’s Q2 net sales of $338 million were down 1% versus a year ago and that comparable sales were down 4%. Gap is forecasting that Athleta will return to positive comparable sales growth for the remainder of the year. Gap also listed that its Athleta stores are now up to 271 in North America, a gain of just 1 store from the Q1 reporting. And for price, maybe some of the discounting is due to sales at the present time but many of the “starter” prices at Athleta look to be $10 to $20 less at the base level.

COMPANY GUIDANCE AND TRANSLATION INTO VALUATIONS

LULU’s guidance is still showing growth in 2024 for Q3-2024 and Fiscal Year 2024. Net revenue was put in a $2.34 billion to $2.365 billion range (6% to 7% growth) in Q3-2024; and diluted EPS of $2.68 to $2.73 for Q3-2024.

The annual reports are going to matter more for how long-term investors have their views. LULU’s current market cap is about $32.3 billion based on a $258.70 share price.

For Fiscal Year 2024– revenue was put in a $10.375 billion to $10.475 billion range, representing growth of 8% to 9%. That revenue growth figure was shown to also be a 6% to 7% range when excluding the 53rd week of 2024. LULU’s guidance for 2024 at the end of the prior quarter had been a range of $10.700 billion to $10.800 billion. Diluted EPS now in a $13.95 to $14.15 range for the year, assuming a tax rate of approximately 30%.

Forward Valuations: 3.1 times 2024 revenues and 18.3 times earnings.

When Lululemon was growing hand over fist in the past, it was never unusual to see current and forward P/E ratios well above 50! And just using the old share price and overlaying the current outlook, investors at the peak were paying over 36-times 2024 earnings whether they knew it or not.

The analyst community for the forward year have earnings pegged at closer to $15.00 EPS and $11.5 billion in revenues. If that holds up, without currency fluctuations (and extra weeks and tax changes), investors considering LULU today and looking out nearly 18 months ahead are paying about 17-times next year’s EPS and about 2.8-times revenues.

Keep in mind that LULU’s “Power of Three ×2” longer-term growth plan was calling for a doubling of the business from 2021 to 2026 — taking its revenue of $6.25 billion then to $12.5 billion by 2026. LULU has always been more focused on women’s apparel, but that growth plan targets are to double men’s revenue, double e-commerce revenue, and then to quadruple international net revenue.

CASH USE & INVENTORY

All growth companies need cash to fund their growth. They also have to manage inventories. Higher inventories can signal slower demand if there is too much inventory growth. Crashing inventories can mean they do not have enough product to meet demand ahead.

LULU ended the second quarter with $1.6 billion in cash and cash equivalents, and the capacity under its committed revolving credit facility was $393.7 million. Its Q1-2024 cash was $1.9 billion and $393.8 million in its revolving credit capacity.

Q2 ended with inventories at $1.4 billion. That is down 14% versus Q2-2023 at $1.7 billion, but it is versus $1.3 billion for Q1-2024.

LULU does have a stock repurchase plan in place but it pays no dividend at the current time. The company appears to have used the recent share price weakness to repurchase more shares. On May 29 (2024) LULU’s board approved a $1 billion increase to its stock repurchase program, for a total of $1.7 billion remaining on that repurchase program. LULU spent $296.9 million in Q1 to repurchase 0.8 million shares (approximately $371.12 per share). In Q2, LULU repurchased 1.9 million shares for a cost of $583.7 million (approximately $306.84 per share).

WALL STREET ANALYST CALLS

Jim Duffy, an equity research analyst for Stifel, has opined that Lululemon can be a global leader in fitness apparel. His pre-earnings call on August 22 maintained a Buy rating but LULU’s price target was taken down to $370 from $416 in that report. Duffy’s price target peaked at $596 during the boom, and that target was cut several times — to $539 in March; to $410 in May; adjusted higher to $416 in June; and then cut to $370 most recently. His view is that LULU can be a global leader in fitness apparel. Despite the company having to pull a product from the shelves, here is his bullish stance with expectations of an investor outlook reset given in a Yahoo! Finance video just before the earnings report:

“We think it’s broadly expected that there’s going to be a reset to the outlook. We, however, want to buy the stock ahead of that. This is the best economic model in my coverage universe. Now we are believers in the global trend of greater concern for health, wellness, fitness, self-actualization. Lululemon uniquely positioned to lead that trend.”

Analysts have almost unilaterally lowered their price targets handily after this latest earnings report. Many of those analysts have maintained that Lululemon’s ultimate growth story can still be achieved and they have maintained their positive formal analyst ratings looking forward.

Tactical Bulls has gone back over the last year to see where each of these analyst price targets peaked and that has been shown if it was available. There is no way to track every single firm’s report because there are more than 30 analysts listed with targets and some of the firms issuing ratings and targets are quite small or are boutique firms. Here goes in alphabetic order:

• BofA Securities (Buy) target cut to $355 from $440 (target in May was $530)
• Barclays (Equal-Weight) cut target to $261 from $263 (target in March was $610 with an Overweight rating)
• Bernstein (Market Perform) cut target to $325 from $345 (target in April was $430)
• Deutsche Bank (Neutral) raised target to $292 from $291 (target in June was $357)
• Guggenheim (Buy) cut target to $350 from $525 (target in March was $550)
• KeyBanc Capital Markets (Overweight) cut target to $350 from $415 (target in March was $570)
• Morgan Stanley (Overweight) target cut to $326 from $329 (target in March was $539)
• Piper Sandler (Neutral) target raised to $260 from $250 (target in March was $560)
• Raymond James (Outperform) target cut to $325 from $350 (target was just $400 right before earnings)
• TD Cowen (Buy) raised target to $382 from $375 (target in March was $553)
• Truist (Buy) sticks at $310 (target in March was $561)
• Wedbush (Outperform) target cut to $324 from $400 (target in May was $492)

OTHER ANALYST TAKES ON LULU

Jefferies has maintained an Underperform rating for all of 2024, and it had a $220 target as of July. The post-earnings report from Jefferies remains with an “Underperform” rating (a Sell rating by all accounts). Jefferies even thinks that Lululemon investors should sell into any strength after the weak quarterly outlook that was issued. As noted above, Jefferies has said that both the Lululemon brand and the company’s financial performance have peaked. Headwinds from a further slow down in the North American market, also have to deal with increased competition, ongoing fashion trend shifts, and ultimately dealing with negative guidance revisions ahead. Jefferies even worries that the U.S. women’s clothing segment may be close to turning negative and that any delays getting new products to market leaves the door open for competitors to go attack LULU’s market share. Jefferies even noted that relying on continued growth from China is risky because of macro dynamics specific to China.

There were some other analyst calls ahead of earnings, some of which were shortly before and some of which were in the past when analysts started to bail on the “forever long LULU” theme. Here are some:

• Stifel had a Buy rating and $370 target ahead of earnings (target was $596 in March).
• Goldman Sachs downgraded LULU to Neutral from Buy and cut its target to $286 from $463 back on August 2. Its price target in may was $521 before lowering it.
• HSBC had started LULU as a Buy with a $500 price target back in September-2023, but in January it cut the rating to Hold.

THE STOCK CHART & PERFORMANCE

LULU’s stock chart is not a pretty chart if you are just looking at 2024. The good news around $258 appears to be that LULU may have bottomed at $230 during the early August sell-off. That would represent nearly a 10% bounce. The bad news at $258 is that LULU shares are down 49.6% YTD and down 31.6% from a year ago. The stock is also still down 50.1% from its all-time high of $516.39.

This seems hard to imagine, but LULU shares are now back down to the early 2020 pre-pandemic peak. LULU shares fell to $165 or so during the peak of pandemic panic-selling. It then rapidly recovered to about $350 by the end of 2020 and experienced a multi-year high of around $475 in November-2021. That peak was not recaptured until very late in 2023 before its blow-off top above $500 in December. With a $32+ billion market cap on Friday, that also means that LULU has seen $32 billion worth of its share value destroyed in 2024.

The 200-day moving average is still about $120 higher than the current share price. If LULU shares just remained flat then it might be another half-year before LULU’s 200-day moving average comes back into play.

The charts below are courtesy of StockCharts.com for your review:

WHAT SHORT SELLERS HAVE BEEN DOING

While no one seems to like short sellers, it is a fool’s errand to avoid considering what they are doing. After all, selling a stock short actually takes much more courage than buying a stock. Short selling a stock comes with literally unlimited downside because the stock price can rise far more than it can fall. Short sellers also have to pay the broker loan call rate (interest) and sometimes they have to pay a premium to borrow a stock. LULU trades approximately 2.5 million shares on an average day at the present time. Here is what they NASDAQ Short Interest report looks like for the last year (up to 8/15/24) based on settlement date and based on the number of shares short:

• 08/15/2024  4,455,282
• 07/31/2024  4,420,545
• 07/15/2024  5,562,180
• 06/28/2024  5,430,972
• 06/14/2024  4,902,557
• 05/31/2024  4,032,659
• 05/15/2024  4,005,809
• 04/30/2024  3,489,249
• 04/15/2024  3,793,978
• 03/28/2024  4,090,683
• 03/15/2024  3,461,920
• 02/29/2024  2,968,747
• 02/15/2024  2,691,150
• 01/31/2024  2,851,090
• 01/12/2024  3,430,868
• 12/29/2023  3,755,947
• 12/15/2023  4,459,140
• 11/30/2023  4,789,638
• 11/15/2023  5,744,528
• 10/31/2023  5,984,652
• 10/13/2023  2,728,566
• 09/29/2023  2,464,620
• 09/15/2023  2,191,709
• 08/31/2023  2,243,885
• 08/15/2023  2,465,480

THE TACTICAL BULLS TAKE

Many analysts are still calling for LULU to rise back above $300 again. Almost none of the analysts who have made price target updates are now calling for the stock to return to $400 — and when that elusive $500 could become in-play again relies on too many upside and best-case scenarios to list.

Some investors may still list Lululemon as a growth stock. It pays no dividend, but that may be next on the agenda for long-term shareholder demands. And while the company has been retiring shares, the most recent shares repurchased were made at average prices of $50 higher than now in Q2 and over $110 per share higher in Q1.

The Tactical Bulls view is that LULU should now be considered as a growth story that has now matured. Being classified as a growth-into-maturity transition is usually quite painful for investors. That has been the case. Now LULU is just another more mature retail apparel player with more competition and more macro headwinds in its face. The company is still projecting growth ahead that does not seem unreasonable, and it has a lower-than-market forward P/E ratio versus many retail and apparel players in the S&P 500.

Again, how you interpret this 360-degree review of LULU shares is up to you and your financial advisor.