Lululemon is a popular athletic apparel brand known for its high-quality women's leggings.

However, the company has been dealing with an excessive inventory for multiple quarters.

On March 28, 2023, Lululemon announced its Q4 earnings for the FY22 period, which exceeded expectations. Additionally, the company provided optimistic guidance for its fiscal year 2023.

Does this suggest that the worst is behind them? Let's find out!

01 Business Model

Lululemon is a Canadian athletic apparel brand that was founded in 1998 and originally focused on women's yoga clothing.

Today, the company offers a range of athletic wear, including men's clothing and gear for running, training, and other activities. Lululemon's products are known for their high quality, innovative materials and construction techniques, and comfortable, form-fitting designs.

They sell through their own stores (company-operating stores) and websites (Direct to consumer), instead of relying on other retailers, which let them control pricing, expenses, product selection, and marketing. This helps them stay a premium brand.

The company has experienced rapid growth, with its store count doubling since 2014 and currently operating 655 stores worldwide.

The company's revenue was US$8.1 billion in FY2022, and 45.61% was generated by its direct to consumer segment.

02 Strength

Lululemon has a high gross margin.

Lululemon makes more money than its competitors due to its loyal customer base that is willing to pay a premium price for its high-quality products, such as its popular women's yoga pants, which are priced between US$98 and US$128.

This higher price point allows Lululemon to maintain a larger gross profit margin of 55% compared to competitors like Nike, Under Armour, and Adidas, who have lower profit margins of around 43%, 44%, and 47%, respectively, in fiscal year 2022.

03 Growth Potential

Lululemon has a clear roadmap for future expansion.

Lululemon laid out its "Power of Three x2" five-year plan in April 2022, which focuses on three key growth pillars:

● Product Innovation: Lululemon aims to double its men's revenue by 2026.

● Guest Experience: The company has set a target to double its digital revenue by 2026.

● International expansion: Lululemon plans to quadruple its international revenue relative to 2021 by 2026.

The new Power of Three x2 plan is supposed to double revenue from US$6.25 billion in 2021 to US$12.5 billion by 2026, reflecting a compound annual growth rate (CAGR) of 15% over the five-year period.

Source: Lululemon Athletica Inc. 2022 Analyst Day

04 Financial

Lululemon is making steady progress towards achieving its "Power of Three x2" five-year plan.

In FY2022, the company's revenue surged to US$8.1 billion, representing a 30% year-over-year increase. Additionally, the adjusted EPS rose by 29%, reaching US$10.07 per share.

Over the last three years, Lululemon has maintained a compound annual growth rate (CAGR) of 26%, 46%, and 39% for men's revenue, digital revenue, and international revenue, respectively.

Inventory is a significant metric for retailers. If a retailer has too much inventory, it may have to cut prices and run sales to unload overstocked merchandise, which may lead to a drop in profit margin.

Lululemon experienced a significant increase in inventory in the first three quarters of FY2022. However, Lululemon said in FY22Q3 that this high point of inventory is a purposeful increase in order to meet the explosive demand brought about by the holiday season.

In FY22Q4, Lululemon's inventory levels have dropped compared to the previous quarter, declining by almost US$300 million to reach US$1.4 billion.

Source: Macrotrends, Lululemon earnings reports

05 Risk

● Rising Inflation

Lululemon is exposed to the risk of economic recession or sustained inflation, which could have a negative impact on consumer spending and demand for its products.

● Underperformed Growth

There is the risk of falling short of market expectations regarding its Power of Three ×2 growth strategy, which could negatively impact its stock performance.

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