Lululemon: Strong Company, Uncertain Times, Hold

seekingalpha05-11

Mixed signals in the consumer discretionary sector prompt caution for Lululemon and other stocks sensitive to economic cycles. Last quarter, Lululemon delivered strong financial performance ...

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However, near-term volatility is possible due to economic headwinds.My analysis specializes in identifying companies that are experiencing growth at a reasonable price. Rating systems don't consider time horizons or investment strategies. My articles aim to inform, not to make decisions.","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"LU1804176565.USD":"EASTSPRING INV GLOBAL GROWTH EQUITY \"A\" (USD) ACC","BK4581":"高盛持仓","SG9999015945.SGD":"LionGlobal Disruptive Innovation Fund A SGD","COLM":"哥伦比亚户外","IE00BWXC8680.SGD":"PINEBRIDGE US LARGE CAP RESEARCH ENHANCED \"A5\" (SGD) ACC","BK4548":"巴美列捷福持仓","MCD":"麦当劳","SG9999015986.USD":"LIONGLOBAL DISRUPTIVE INNOVATION \"I\" (USD) ACC","AMZN":"亚马逊","SG9999015978.USD":"利安颠覆性创新基金A","LU0070302665.USD":"FRANKLIN MUTUAL U.S. VALUE \"A\" (USD) ACC","UA":"安德玛公司C类股","IE00BKDWB100.SGD":"PINEBRIDGE US LARGE CAP RESEARCH ENHANCED \"A5H\" (SGDHDG) ACC","LU0310799852.SGD":"FTIF - Templeton Global Equity Income A MDIS SGD","LU1720051017.SGD":"Allianz Global Artificial Intelligence AT Acc H2-SGD","BK4528":"SaaS概念","LU1244550221.USD":"FRANKLIN GLOBAL MULTI-ASSET  INCOME \"A\" (USDHEDGED) INC (M)","BK4554":"元宇宙及AR概念","BK4592":"伊斯兰概念","LU1718418525.SGD":"JPMorgan Investment Funds - Global Select Equity A (acc) SGD","SHOP":"Shopify Inc","ADDDF":"adidas AG","LU0149725797.USD":"汇丰美国股市经济规模基金","LU2133065610.SGD":"JPMorgan Investment Funds - Global Dividend A (mth) SGD","LU0127658192.USD":"EASTSPRING INVESTMENTS GLOBAL TECHNOLOGY \"A\" (USD) ACC","BK4108":"电影和娱乐","LU0289941410.SGD":"AB FCP I Dynamic Diversified AX SGD","LU1303367103.USD":"摩根大通多经理另类基金 A (acc)","LU2098885051.SGD":"JPMorgan Funds - Multi-Manager Alternatives A (acc) SGD","SBUX":"星巴克","BK4558":"双十一","NKE":"耐克","BK4524":"宅经济概念","LU0417517546.SGD":"Allianz US Equity Cl AT Acc SGD","IE0004445239.USD":"JANUS HENDERSON US FORTY \"A2\" (USD) ACC","LU1861559042.SGD":"日兴方舟颠覆性创新基金B SGD","BK4527":"明星科技股","BK4559":"巴菲特持仓","LU0109392836.USD":"富兰克林科技股A","BK4550":"红杉资本持仓","BK4116":"互联网服务与基础架构","BK4579":"人工智能","ABNB":"爱彼迎","LU0390134368.USD":"FRANKLIN GLOBAL GROWTH \"A\" (USD) ACC","LU0056508442.USD":"贝莱德世界科技基金A2","LULU":"lululemon athletica","DIS":"迪士尼","LU2265009873.SGD":"Eastspring Investments - Global Growth Equity AS SGD-H","BK4551":"寇图资本持仓","IE00BMPRXN33.USD":"NEUBERGER BERMAN 5G CONNECTIVITY \"A\" (USD) ACC"},"translate_title":"Lululemon：强大的公司，不确定的时代，持有","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"ADDDF":1,"UA":1,"SHOP":1,"SBUX":1,"NKE":1,"MCD":1,"LULU":1,"DIS":1,"COLM":1,"ABNB":1,"AMZN":1},"content_text":"Mixed signals in the consumer discretionary sector prompt caution for Lululemon and other stocks sensitive to economic cycles.\n        Last quarter, Lululemon delivered strong financial performance but disappointed investors with its outlook, leading to a 16% drop in stock price.\n        While the company is experiencing growth in international markets, its core North America market is stagnating, reflecting a shift in consumer behavior.\n        Initiating coverage with a hold based on Lululemon healthy financials, strong management team, and international potential. However, near-term volatility is possible due to economic headwinds.\n        My analysis specializes in identifying companies that are experiencing growth at a reasonable price. Rating systems don't consider time horizons or investment strategies. My articles aim to inform, not to make decisions.\n           Eric Broder Van Dyke/iStock Editorial via Getty Images Investment Thesis With economic data digested and the Fed meeting behind us, earnings season takes center stage. However, mixed signals abound, prompting caution, especially for consumer discretionary stocks – a sector hypersensitive to economic cycles. Morgan Stanley’s Mike Wilson, one of my favorite equity strategists, points to reports from McDonalds (MCD), Starbucks (SBUX), and Amazon (AMZN) that belt tightening is underway. This trend continued this week with Shopify (SHOP), Disney (DIS), and Airbnb (ABNB) all providing weaker guidance. I agree with Wilson’s opinion of a “bifurcated” consumer landscape: stability at the very high-end and weakness at the lower end. This will be a “trade-down” behavior, with consumers shifting from discretionary stocks, like Lululemon (NASDAQ:LULU) to staple goods, reflected in recent earnings revisions. While Lululemon boasts healthy financials, a management aligned with growth of the company, and ample financial resources, the current economic climate with “higher for longer rates” presents challenges. Given the potential for a trade-down behavior and discretionary spending cuts, I am inclined to start my coverage with a Hold. I believe the company is well positioned for the long term, but a wait-and-see approach is more prudent until economic conditions become clearer. Strong Company Weak Consumer Lululemon delivered a strong beat on holiday quarter earnings, exceeding analysts’ expectations with EPS of $5.29 vs $5 and $3.21 vs $3.19 Billion on revenue. However, the company’s outlook disappointed investors, leading to a 16% plunge in stock price. As of the time of this writing shares are down about 30% YTD. Despite the impressive financial performance, Lululemon’s short term future seems less certain. Sales growth in North America, the company’s core market, is stagnating compared to previous years. Last quarter, sales rose 9% in the Americas compared to 29% in the year ago period. This slowdown is likely due a to a combination of several factors including, end of pandemic stimulus, tougher competition, and shift to a more cautious consumer behavior.   LULU 10kFortunately, Lululemon is experiencing robust growth in international markets, particularly in China, where sales growing 78% last quarter, this helps offset the North America slowdown. However, the company’s current and full-year guidance fell short of analyst’s expectations of revenues growing at a 12.5% rate with a guidance of only 9 to 10%. This reflects concerns about the U.S. market. CEO Calvin McDonald acknowledged during the earnings call this shift in consumer behavior and attributed lower traffic and conversions in the US to a lack of size and color options. “We're seeing a slowdown in traffic in the U.S., but it's still positive and conversion is down slightly. And I link that to some of the product opportunities we have in the sizing and color, which as I said, we will -- we are chasing until we will get stronger through the quarters.” On the economic front, consumer confidence fell for the sixth month low, and the inflation outlook is at its highest since November 2023 jumping to 3.5%. If these trends continue it will pressure retailer margins and slow sales for consumer discretionary stocks. Despite the challenging domestic market, I believe, Lululemon’s long term prospect remain promising. The company’s strong brand, loyal customer base, and continued international expansion offer reasons for optimism. Investors should carefully consider this mixed picture, including the short-term economic headwinds in the US market which is why I am inclined for a wait and see approach. Management Evaluation Lululemon is steered by CEO Calvin McDonald, who took the helm in 2018. McDonlad brings a wealth of retail experience, having previously led Sephora Americas and holding leadership positions in Sears Canada and Loblaw, Canada largest retailer. Since 2021, his focus has been on international expansion, aiming to quadruple international sales from 2021 levels. Employee reviews on Glassdoor reflect his leadership success, with an impressive 88% approval rating.   Glassdoor.comCFO Meghan Frank, with the company since 106, boasts a long a successful career in retail at Ross, JCrew, and Saks Fifth Avenue. Her performance is evident in Lululemon’s exceptional ROE of 44%, exceeding the industry average of -5%. This growth is rated B+ by SeekingAlpha, highlighting her expertise.   SeekingAlphaIn my articles I will now start measuring, whenever possible, what I call the “CEO alignment ratio”, measuring the portion of compensation tied to stock awards, which I believe will provide us with an insight into a CEO’s long term commitment and motivation. That is, do they think as a part owner or do they think as a paid employee. In 2022, over 60% of Calvin McDonald’s compensation came from stock options and awards. This high alignment ratio suggests he views Lululemon a long term investment, aligning his interests with shareholders. His compensation last year was very similar.   Salary.comWhile Lululemon boasts competent leadership with a strong focus on international growth, recent issues in the US market highlight a potential need for improvement in inventory management and anticipating consumer behavior shifts. For these reasons, I am giving Lululemon management a “Meet Expectations” rating. Corporate Strategy Lululemon holds a smaller market share of the activewear market compared to Nike and Adidas but enjoys higher brand loyalty and premium pricing with room for expansion to new products and target markets. I have created the table to highlight some of the differences between some of the competitors in the space.    Lululemon Nike (NKE) Under Armor (UA) Adidas (OTCQX:ADDDF) Columbia (COLM)   Market share 9% 51% 5.8% 23% 3.5%   Corporate Strategy Focus on international expansion and high quality yoga inspired athletic apparel. Focus on innovation across footwear, apparel, and digital experiences. Expanding into new markets and products categories Revitalizing brand image, focusing on performance innovation and digital marketing Emphasis on sustainability innitiatives and digital transformation. Growng focus on womens appeareal and athletic footwear Focus on outdoor apparel and footwear, expanding into performance footwear and leveraging its direct to consumer channels   YTD Stock Perfomance -31% -14% -20% +18.18% 4.34%   Click to enlarge Source: From companies’ website and presentations Market share: Statista (2023) Valuation Lululemon currently trades at around $353 after dropping around 16% after reporting earnings in late March. Employing a conservative 10% discount rate ((r)). This represents a hurdle rate that an investor expects to receive considering time value and inherent risk of that investment. To calculate it, I used a 4% rate for time value and because I consider LULU a company with healthy financials and strong management I used a 6% average market premium. Then, using a simple 10 year two staged DCF calculator and I reversed the formula to obtain its implied EPS growth rate which is around 15%. $353 = sum^10 EPS (1 + \"X\") / 1+r) + TV EPS (1+g) / (1+r)*I also added Book Value in the calculation That is, the market currently anticipates Lululemon’s EPS to grow at 15% this year. However, Lululemon’s expected EPS growth is 16.48%. So, valuation seems to be almost at a fair value. Technical Analysis LULU was priced for perfection and close to all-time highs when they reported earnings last month and even though it was a good quarter, guidance was soft for investors. The current impact of high interest rates on the economy are slowly impacting the economy and I believe there will be a lot of pressure on consumer discretionary stocks affecting their momentum so I believe based on technical analysis that the price will fluctuate between $315 - $400 I will review my investment thesis as needed when it breaks below or above this band. Next earnings report is due June 6 th.   TradingViewTakeaway  Lululemon is a well-run company with a strong brand and loyal customers, but its facing headwinds. The economic slowdown is expected to hurt consumer spending on discretionary items like Lululemon’s apparel. While the company is expanding internationally, its core North America market is slowing down. The stock price currently reflects this uncertainty, and I believe a wait-and-see approach seems more reasonable, at least for the short term, until the economic picture becomes clearer.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2434217088"}