TLDR;
This video provides an analysis of Lululemon, covering its business model, financials, competitive advantages, and potential risks. It examines the company's history, growth strategy, and current challenges, including slowing growth and increasing competition. The video also offers a valuation analysis with bare, base, and bull case scenarios, and concludes with key takeaways summarized in a radar chart format.
- Lululemon's revenue growth is slowing down, raising concerns about its future performance.
- The company faces increasing competition, particularly from Alo Yoga, which is impacting its market share and margins.
- Management's compensation structure, based on revenue and operating income growth rather than return on invested capital (ROIC), is a potential red flag.
Intro [0:00]
The video introduces Lululemon and discusses the recent 31% stock decline due to revised earnings per share and operating margin guidance. The analysis aims to determine if the market's reaction is justified by examining the business model, financials, competitive advantages, and risks.
Founding & Milestones [0:53]
Lululemon was founded in 1998 by Chip Wilson in Vancouver, Canada. After selling off previous apparel businesses, Wilson identified a need for more flattering yoga attire. The company went public in 2007, using the IPO capital for market expansion. Christine Day took over as CEO in 2007/2008 and oversaw growth in North America, followed by expansion into English-speaking international markets like Australia, New Zealand, and the UK. Lululemon then expanded into men's apparel, accessories, and the Asia-Pacific market, particularly China. During 2019-2022, under CEO Calvin McDonald, the company experienced high demand and launched women's and men's footwear lines. The acquisition of Mirror, intended for hardware-software integration for at-home exercise, eventually led to a write-down, with operations handed over to Peloton. From 2022 to 2027, the company aims to double revenue, double men's revenue, double digital sales, and quadruple international revenue.
Business Model [3:53]
Lululemon provides premium, performance-driven apparel known for comfort, style, and durability, targeting fitness and yoga enthusiasts, and now expanding to runners, tennis, and golf enthusiasts. The brand has lifestyle branding, appealing to those who wear Lululemon for everyday life. Key suppliers provide fabrics like polyesters, nylons, and cotton, with production primarily in Asia. Key partners include yoga studios, fitness centers, Peloton, brand ambassadors like Lewis Hamilton, and content creators with affiliate programs. The company hosts community events and workshops worldwide. Gross margin is affected by the cost of goods sold and manufacturing costs, while operating margin is impacted by shipping, fulfillment, marketing, e-commerce, retail, warehouse, and corporate admin costs. Capex affects free cash flow through reinvestments in store renovations, new store openings, and technology investments like RFID.
Power of 3 x 2 [11:06]
Lululemon's "Power of Three x 2" strategy aims to double revenue from $6.2 billion in 2022 to $12.5 billion by 2027, focusing on doubling men's revenue, doubling digital revenue, and quadrupling international revenue. While the company exceeded its projected revenue targets in 2023 and 2024, it is starting to show some cracks in 2025, with only a 5% difference in where their trajectory is supposed to take them. Men's revenue growth has slowed from 6% to 4.7%, digital revenue growth has significantly decreased from 10.8% to 2.8%, and international expansion is underwater in terms of targets.
Global Expansion [13:51]
Lululemon has 767 company-operated stores as of February 2nd, with plans to open in five new countries in 2025 through third-party or franchisee licensing agreements. Longer-term targets include expanding into India, Indonesia, Philippines, and Vietnam, focusing on the South Asia market, particularly India, which is expected to be a booming economy.
Customer Experience & Products [14:42]
Lululemon focuses on customer retention through store educators and a loyalty program offering partner perks, early access to product drops, exchanges or credit on sale items, select Peloton classes, membership events, and free hemming. The company also has a "Like New" resale program, aligning with sustainability initiatives and capturing value from customers seeking more affordable options. Innovations include proprietary fabrics like Luon, Luxtreme, and Nulu, with the Align Pant being a hero product generating $1 billion in revenue. The men's line features the ABC pant, with the goal of creating $1 billion revenue streams for all product lines.
Industry Analysis [17:22]
The athleisure market, which Lululemon helped create, is expected to grow at around 9.2% until 2034. India is projected to become the world's third-largest consumer market by 2027, presenting a growth opportunity. The "silver spenders" or mature women, are also a key demographic with significant spending power. Headwinds include inflation, geopolitical instability, and declining consumer confidence. Trade tariffs are impacting Lululemon's guidance, with increased shipping costs from Asia to the US and more trade restrictions.
Competitors [19:47]
Lululemon is positioned between a mature and early-growth business, with 770 stores compared to Adidas (2,000) and Nike (1,000). Competitors include Nike, Adidas, Under Armour, and Puma, as well as premium challengers like On Running, Gym Shark, Fabletics, and Alo Yoga. Alo Yoga is a significant competitor, with many of its stores located near Lululemon stores. Alo Yoga is positioning itself as a more bougie, boutique brand, partnering with celebrities like Kylie and Kendall Jenner. Alo Yoga is expanding rapidly, including into the Middle East and Brazil, where Lululemon has no presence. Lululemon is targeting tennis, racket sports, runners, hikers, and gym-goers, while Alo Yoga is focused on yoga, beauty, and fashion.
ROIC [25:00]
The products by Alo Yoga is more differentiated than Lululemon but generally speaking the products both of them are going to be very differentiated relative to the entire industry or the entire market. Lululemon maintains higher NOPAT margins compared to competitors like Nike and Under Armour, but its invested capital turns are declining. Lululemon's ROIC is at 61%, a phenomenal figure, although it is declining. The return on incremental invested capital is decreasing, with recent investments destroying value rather than creating it.
Financials [30:52]
Lululemon has grown revenue from $4 billion to $10.5 billion at a 21% compound annual growth rate (CAGR). Revenue per share growth is higher at 23% due to share buybacks. However, revenue growth is slowing down to 7% year-on-year. Comparable sales growth, which excludes new stores and accounts for currency fluctuations, is also decreasing. Operating margins are reducing, while SG&A expenses are increasing due to marketing and administration costs. Free cash flow has seasonality, with Q1 typically being less profitable. Inventory turnover is declining, potentially due to rapid store expansion. The company has zero interest-bearing debt and $1.3 billion in cash. Recent activity includes the purchase of Mexican-based stores. The company repurchased 5.1 million shares at an average price of $313.
Management & Culture [38:40]
Calvin McDonald has been the CEO since 2018, with an 83% approval rating. He previously served as CEO of Sephora Americas and Sears Canada. There has been a restructuring in key personnel, with the chief product officer role, previously held by Sun Choe, not being replaced. Employee incentives include monthly wellness amounts, parenthood programs, and competitive wages. Calvin McDonald's compensation includes a base salary of $1.3 million, with 91% of his compensation at risk through performance-based stock units (PSUs). However, bonuses and PSUs are calculated based on operating income and net revenue growth, rather than ROIC, which is a concern.
Competitive Advantages [42:29]
Lululemon's competitive advantages include processing power due to vertical integration and control over the customer journey, global operational expertise, and strong branding. Counterpositioning is limited as competitors copy their strategies. Switching costs are low due to the lack of patents. Scale economies are limited, and pricing power is weakening as customers become more value-oriented.
Risk [45:34]
Key risks include competition, brand dilution, execution risk around new store openings, capital allocation strategies, and macro factors such as tariffs.
Valuation [46:23]
The video presents a valuation analysis with bare, base, and bull case scenarios. The bare case assumes 5% revenue growth, margin compression to 20%, and a fair value of $221, resulting in a 5.8% rate of return. The base case assumes 8% revenue growth, margin compression to 20%, and a fair value of $258, resulting in a 7.5% return. The bull case assumes 12.5% revenue growth, margin improvement to 23%, and a return of 11.5%.
Key Takeaways [48:49]
The video concludes with a radar chart summarizing the financials, business, management, risks, and valuation. The financials are strong due to high ROIC and margins. The business benefits from competitive advantages and international potential. Management is a mixed bag due to the long-term incentives based on growth rates rather than ROIC. Risks are moderate, with a less than 50% chance of all risks culminating. The valuation is decent, with more upside than downside potential.