US Market Adaptation And Cost Controls Will Build Resilience

Key Takeaways

• Rising operational costs and macroeconomic challenges are constraining gross and net margins, affecting revenue growth projections.
  
• Strategic investments in marketing elevate spending, with increased SG&A rates impacting financial leverage.
  
• Lululemon's financial performance risks include low brand awareness in international markets, macroeconomic challenges, tariff impacts, foreign exchange issues, and rising SG&A expenses.

Catalysts

Designs, distributes, and retails technical athletic apparel, footwear, and accessories for women and men under the lululemon brand in the United States, Canada, Mexico, China Mainland, Hong Kong, Taiwan, Macau, and internationally.

• Lululemon is experiencing increased operational costs due to FX headwinds and tariffs, which may lead to decreased gross margins by about 60 basis points versus the previous year.
  
• Revenue growth in the U.S. is projected to be modestly positive, which could result in lower sales growth forecasts and impact overall revenue expectations.
  
• The company is navigating a cautious consumer environment with macroeconomic pressures, manifesting in slower traffic, potentially leading to lower sales growth and affecting overall revenue.
  
• Marketing and brand campaigns are positioned as strategic investments rather than direct drivers of immediate revenue, which maintains an increased SG&A rate expected to deleverage by 40 to 50 basis points.
  
• Despite a strong product pipeline, modest expected top and bottom-line growth for 2025, and potential downside from increased store labor and incentive costs, may constrain improvements in net margins.

lululemon athletica Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on lululemon athletica compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming lululemon athletica's revenue will decrease by 0.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 17.1% today to 20.0% in 3 years time.
• The bearish analysts expect earnings to reach $2.2 billion (and earnings per share of $11.76) by about April 2028, up from $1.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 17.8x on those 2028 earnings, up from 17.1x today. This future PE is greater than the current PE for the US Luxury industry at 13.9x.
• Analysts expect the number of shares outstanding to decline by 3.49% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.6%, as per the Simply Wall St company report.

lululemon athletica Future Earnings Per Share Growth

Risks

• Lululemon's reliance on international markets, where brand awareness is low, could hinder revenue growth if the brand fails to gain traction in these regions.
  
• The macroeconomic environment and cautious consumer spending in the U.S. could dampen sales growth, impacting overall revenue and profitability.
  
• Tariff increases from China and Mexico are expected to exert pressure on gross margins, potentially reducing overall profitability.
  
• Foreign exchange headwinds are anticipated to negatively impact revenue growth and earnings per share, affecting Lululemon's financial performance.
  
• Increased SG&A expenses due to investments in marketing and international expansion could lead to operating margin contraction if sales growth does not offset these costs.

Valuation

• The assumed bearish price target for lululemon athletica is $285.36, which represents one standard deviation below the consensus price target of $349.86. This valuation is based on what can be assumed as the expectations of lululemon athletica's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $500.0, and the most bearish reporting a price target of just $194.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $10.8 billion, earnings will come to $2.2 billion, and it would be trading on a PE ratio of 17.8x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $256.62, the bearish analyst price target of $285.36 is 10.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.