For several quarters now, the North American group has been trying to extricate itself from a delicate position. The current year marks the end of over two decades of double-digit growth. If this were just a temporary blip, the market would no doubt put it into perspective. But the malaise appears to run deeper.
In recent years, Lululemon has rightly focused on international diversification. Particular emphasis has been placed on China. However, after a promising start, the brand is seeing its lead eroded: local retailers now offer imitation textiles of comparable quality at much more affordable prices, while more upmarket competitors, such as Alo Yoga, are also gaining ground.
In North America, which remains the largest market with nearly three-quarters of sales, the situation is just as worrying. American consumers, keen to preserve their purchasing power, are turning away from the brand, which sells leggings that can easily exceed $100. Lululemon has also placed too much emphasis on declining ranges such as lifestyle and relaxation, and has missed out on opportunities offered by seasonal trends.
Added to this is the issue of customs duties and the removal of the de minimis exemption, which until now allowed packages worth less than $800 to be imported into the US without paying duties or taxes. Lululemon manufactures most of its products in Vietnam and China and is therefore affected by the new trade policy. Transitional solutions have been found, such as routing two-thirds of US online orders through Canadian warehouses. But this will not be enough. The expected tariff impact is around $240m on this year's profits.
To contain the erosion of margins, long one of the group's major advantages over other sports equipment manufacturers, Lululemon is still banking on price increases. The strategy is of course risky and could accentuate the decline in demand: in the United States, comparable sales already fell by 4% in Q2.
The outlook is hardly more reassuring. The end of the year, which is traditionally a busy period for the brand, looks set to be rather lean. Forecasts have been lowered after already being lowered in the previous quarter: revenue is now expected to be between $10.85bn and $11bn (compared to $11.15bn to $11.3bn previously) and EPS is projected between $12.8 and $13, compared to an initial range of $14.6 to $14.8.
Finally, in terms of valuation, multiples are at historic lows, well below those of other players in the sector (Nike, Adidas, Deckers, etc.). The stock has returned to its pandemic stock market levels. There are few positive arguments to suggest a short-term reversal of the trend. However, it is worth noting that 14 new stores have been opened and that the share buyback program is continuing, at a better price than in the past when the stock was valued at more than 50x its earnings.
