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Lululemon Stock: Look Below?

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Shares of athleisure pioneer Lululemon (LULU) begin to feel a little relief.

Despite the recent surge in expensive and risky stocks, there is reason to believe that the recent winning streak for these names is more of an opportunity to take profits than the start of a sustained rally.

Lululemon is one of the most intriguing companies with a remarkably long growth track. However, simply having a long growth track is no guarantee of success if a business cannot execute.

The company’s leadership team has done a magnificent job of perfecting the omnichannel experience. The company has perfected both online and offline experiences, the latter of which may be shaken up as the COVID-19 pandemic continues to wane. Can management succeed again as it seeks to go global?

While the company’s strengths in e-commerce are undeniable, Lululemon will need to branch out into new product categories to maintain its high multiple.

The Canadian company, which alone induced the rise of “athleisure” fashion, is not afraid to broaden its field of action. Many tech companies have done this to excite shareholders and pursue new growth verticals.

However, at current valuations, I am skeptical of the company’s ability to continue its string of deep successes. For this reason, I remain bearish on LULU stock.

lululemon: Massive expansion opportunity

Men’s clothing and footwear are not traditional retail areas that Lululemon is known for. That could change as the company looks to put its brand power to the test in an area it’s not as familiar with.

There’s no denying the power of the Lululemon brand, at least in the North American market. If the company can find new success in new corners of the apparel market, the next stage of growth could be astronomical as management prepares to step on the accelerator internationally.

Without a doubt, China is a hot market that could fuel many years of enviable growth. After all, Canadian and American brands are very attractive to Chinese consumers.

As Lululemon builds its brand strength, I think it will be hard to stop the company once it is ready to expand beyond Canada and the United States. However, some challenges could weigh on the company’s ability to gain even more brand affinity.

Rising rivals

The real question is whether the Lululemon brand is attractive enough internationally to justify its above-average prices. Lululemon is not a luxury retailer. At best, it’s on par with Nike or Adidas. Given its many years as a yoga apparel maker, attracting crowds from the non-yoga segment might prove tricky.

Ultimately, I think Lululemon will struggle to branch out into new product categories that go beyond just yoga. At the same time, Lululemon also has to play defense, as other activewear manufacturers like Nike, Adidas and Athleta, a fast-growing yoga apparel brand under the Gap (GPS) umbrella, set their sights on the traditional Lululemon market.

Athleta, in particular, stands out as a significant threat that could undermine the power of the Lululemon brand and its ability to charge high prices. The company has teamed up with Olympic champion Simone Biles and, more recently, singer Alicia Keys, with a logo that’s arguably as graceful as Lululemon’s.

While its growth levers may help drive Lululemon’s growth forward, I find it hard to believe that it can continue to sustain its enviable margin growth once initial margin improvement from DTC (Direct -to-Consumer) begins to fade.

Lululemon’s less than stellar ESG score

Lululemon is highly exposed to commodity price fluctuations. The company faced backlash during the 2022 Beijing Olympics as protesters gathered outside Lululemon’s flagship store, criticizing the company for its fossil fuel (including coal) emissions.

Lululemon doesn’t have the worst ESG score in the world, but it can certainly do better. Climate activists recently shed light on the company’s emissions, which could harm the brand if management does not commit to continuing its efforts to reduce its environmental impact.

Brand power is vital for Lululemon to maintain high margins. Any reputational damage could be a blow to Lululemon and a boon to the likes of a promising, more affordable competitor in the yoga space.

The Taking of Wall Street

According to TipRanks’ consensus rating, LULU stock is looking like a Moderate Buy. Out of 19 analyst ratings, there are 12 buy recommendations, six hold recommendations and one sell recommendation.

Lululemon’s average price target is $420, implying an upside potential of 33.9%. Analyst price targets range from a low of $260 per share to a high of $500 per share.

Conclusion on Lululemon

There’s a lot to love about how far Lululemon has come over the past few years. It’s an omnichannel powerhouse with intriguing opportunities to expand its reach.

With intense competition in the yoga and apparel scene and other headwinds that could weigh on margins, investors should consider whether there is value in buying the stock at more than 46 times the profits. It’s expensive and doesn’t leave much room for error.

Even after the title’s major drop, I’m not inclined to pursue it here. Moreover, it is too early to assess the strength of the brand from a global perspective.

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