Is Lululemon Stretching Beyond What's Realistic?

Lululemon (LULU) held its 2022 Analyst Day on April 20. The highlight of the annual event was the company’s big hairy audacious goal -- often referred to as BHAG -- to double its yearly sales from $6.25 billion in 2021 to $12.5 billion in 2026. 

As a Canadian, I’ve long trumpeted the company as an Under Armour (UAA) killer. While I do not doubt that CEO Calvin McDonald and the rest of the team at Lululemon can meet and exceed this goal, some analysts are skeptical.

Before you run out and buy LULU stock, you might want to consider the pros and cons of this goal before doing so. To save you some time, I’ll do it for you. 

The Pros of Lululemon’s Goal

To meet its goal of $12.5 billion in sales by 2026, it will have to increase its annual revenues by 14.9% in the next five years. 

In 2021, its sales grew by 42%. Excluding currency, they rose 40%. In 2020, despite the store closures due to Covid-19, they increased by 11%, with its e-commerce business doing the heavy lifting. In 2019, e-commerce sales accounted for 29% of its business. In 2020, that jumped to 52%. As stores reopened in 2021, that percentage normalized slightly to a healthy 44%. 

So, on a two-year stack, Lululemon increased sales by 57%. Cut that in half, and its annual growth over the past two years was double the 15% yearly growth required to meet its 2026 goal.

Barring a recession, which is entirely possible, it shouldn’t have a problem hitting this goal, especially if it meets some of its other goals in its Analyst Day presentation. 

For example, it wants to double its men’s and e-commerce business over the next five years while quadrupling its international business. It calls these segments the Power of Three. 

In 2019, it set a goal to double its men’s business by 2023. It achieved this goal two years early. It tripled its digital business between 2018 and 2021. Also, in 2021, it increased its international revenue by 53%. Out of the 53 stores it opened in 2021, all but 10 were outside North America. Investors can expect this to continue in 2022 and beyond. 

Areas of the business that seem to be taking a back seat its women’s and North American businesses. However, they’re expected to grow in the low double digits on a compounded basis while its stores unit should grow in the mid-teens.   

Other possible areas of growth for the company include Mirror, its smart home gym, women’s and men’s footwear, and the creation of a two-tiered membership program -- one free and one paid – to engage further and retain its customer base. As the company said at its Analyst Day, “It’s about getting [people] into the Lululemon lifestyle….”

The company has so many levers to pull; no wonder McDonald is excited about its future.

“We remain early in our growth journey,” CNBC reported McDonald's statement. “I am excited about taking our growth strategies to the next level.”

He should be.   

The Trouble With Overpromising and Underdelivering

Any time you put your goals out there for the investing public to see, you open yourself up to criticism should you fail to meet those goals. So, there’s risk involved in doing so. 

Jeffries analyst Randal Konik believes that supply chain issues are one of several headwinds -- inflation is another -- that could prevent the company from accomplishing its ambitious goal.

“Lululemon’s plan ‘will require an added level of execution prowess,’ as well as stability in the broader macroeconomic environment, that may be difficult to attain,” CNBC reported. 

He suggests that the company’s Mirror smart home gym, which Lululemon paid $500 million for in 2020, is likely to turn out to be a bust as it’s unable to grow the number of users. 

“Our key concern is the slowing of unit sales as consumers return to gyms,” Konik said about Mirror. 

Another analyst from Bernstein, Aneesha Sherman, believes that the company’s international expansion could fall flat on its face given its past experiences with stores outside its home markets of Canada and the U.S. Further, Sherman believes that there’s little room for margin expansion in the future because its women’s market is slowing. 

"It’s not that we don’t like the company — with a high-quality product, a super-loyal following and a good management team, it has good fundamentals,” CNBC reported the analyst said. “But the growth trajectory of core products is slowing and the business model was lending itself to zero margin upside.”

At $375 a share, the risk is that it’s already doubled its sales over the past three years. If it doesn’t do it again and hit the target two years early, investors will be disappointed with the outcome. 

What’s the Call?  

LULU stock is currently trading at 8.0x sales. That’s considerably higher than its multiple of 5.4x in 2018 when it began its last five-year plan. As a result, the wall of worry is getting higher by the day. 

Since McDonald was appointed CEO in July 2018, LULU stock is up 196%, almost 4x the S&P 500. He’s earned the right to make BHAG-type goals for the company. 

He recently hired top executives from Adidas (ADDYY) and Nike (NKE) to help grow its footwear business. Konik believes the footwear business could hurt the company’s margins. I’m a glass-half-full person. I like to think the move by Lululemon into the footwear business could be the final nail in the coffin for Under Armour. 

If you can buy and hold LULU stock for the next five years, I’m confident your decision will be nicely rewarded. Lululemon is one of the premier consumer brands on the planet. I would not be surprised if LVMH (LVMUY) came knocking someday. 

LULU is a long-term buy.