It's been a difficult ride for Lululemon Athletica (LULU 0.12%) investors this year as shares have cratered some 54%. The business that singlehandedly created the athleisure apparel category is facing slower growth and heightened competition that is undoubtedly scaring shareholders.
But Lululemon's bulls hope things can turn around for the better. With that being said, where will this consumer discretionary stock be in three years?
Doing the same thing
Lululemon has long positioned itself as a premium brand in the sportswear market. It's a key strategic focus that helps the company stand out in a crowded field. I don't see this changing anytime soon.
That premium status helps generate robust profitability. In the latest period (first-quarter 2024, ended April 28), Lululemon reported a gross margin of 57.7%. This metric not only stands ahead of Nike's, but it's a clear indication of consumers' willingness to pay up for Lululemon's merchandise.
The business will continue to lean on the same playbook that has worked so well in the past. That means leveraging its community-driven marketing approach, while at the same time leaning on a distribution strategy that emphasizes its direct-to-consumer online channel and company-owned stores.
NASDAQ: LULU
Key Data Points
Key focus areas
Over the next three years, there are also likely to be some changes. As part of the "Power of Three x2" initiative, Lululemon aims to register $12.5 billion in sales in fiscal 2026, double the total of fiscal 2021. To do this, management is focusing on some key areas.
The goal is to double men's and digital sales. But perhaps the biggest untapped growth opportunity for Lululemon is to execute the goal of quadrupling international revenue. In the latest fiscal quarter, 73% of the company's sales were generated in the Americas segment, which includes the U.S. and Canada. There's room to push outside of Lululemon's home continent, like in China, where revenue soared 45% in the first quarter.
With greater scale comes bigger challenges. As Lululemon starts to further penetrate foreign markets, it will begin to compete more directly with the global heavyweights like Nike and Adidas. And in China, where there's a huge opportunity to open more stores, local players like Anta Sports and Li Ning will make it difficult for Lululemon to keep taking market share.
Happy investors
It's safe to say that the market has completely soured on the stock. After their huge dip this year, shares have only climbed 28% in the past five years. In the last three years, they've tanked 41%. That's extremely discouraging.
But I believe there's value in taking advantage of the market's pessimism. As of this writing, the stock trades at a dirt cheap forward price-to-earnings ratio of 16.7. The S&P 500 goes for a 32% premium to this valuation.
You'd think that Lululemon's business was struggling mightily. But that's just not the case, with revenue and net income up 10% and 11%, respectively, year over year in the first quarter.
To be clear, though, Lululemon does face a big risk, as is the case with any fashion enterprise. That's the simple fact that consumer preferences are constantly changing, making it difficult to find durable success.
Plus, the industry has no barriers to entry, meaning it will always be competitive. But I believe Lululemon has proven that it can stand out and remain relevant, even as direct rivals like Alo Yoga and Vuori make notable progress in winning over customers.
As we look out to August 2027, I believe buying Lululemon shares right now and holding them for three years could prove to be a winning bet that can benefit your portfolio.
