Winning can be a perilous act — and doubly so on Wall Street.
Witness Lululemon Athletica Inc.
After at least five years of coming out on top — growing through the pandemic, a bum acquisition with the Mirror at home workout tech and more — Lululemon showed a rare sign weakness with fourth-quarter results.
“There has been a shift in the U.S. consumer behavior of late, and we’re navigating what has been a slower start to the year,” chief executive officer Calvin McDonald warned.
But historically, shifts in consumer behavior happen to other brands, not the 26-year-old Lululemon.
That’s been true year in and year out, through lockdown when everyone went for athleisure and afterward when they dressed back up. Since 2018, the year McDonald became CEO, Lululemeon’s sales have nearly tripled to $9.6 billion, and net profits grew even faster, increasing to $1.6 billion from $483.8 million.
Lululemon has been the company reminding investors that, yes, there is real money and growth to be had in apparel. And investors have been willing to reward Lululemon for playing a leading role.
Even after McDonald’s “slower start” warning, which cut $10 billion from the company’s market capitalization over the last couple weeks, the operation is still valued at about $47 billion, about 15 times the company’s earnings before interest, taxes, depreciation and amortization.
For context, Ralph Lauren Corp. is valued at $11 billion and Coach-parent Tapestry Inc. comes in at around $10 billion; Gap Inc., Levi Strauss & Co., Abercrombie & Fitch Co., PVH Corp. are valued at under $10 billion.
Nike Inc. is still the one to beat, with a market cap of nearly $140 billion, although the company has felt shakier lately with critics pointing to a lack of product innovation and adjustments to the company’s Consumer Direct Acceleration strategic plan.
Analysts are largely standing by Lululemon — seeing a tougher consumer climate and a short-term inventory mismatch that disappointed younger customers when the brand was light on smaller sizes and color.
But the spotlight is shining brightly and Wall Street is trying to figure out just how to value Lululemon now.
Morgan Stanley analyst Alex Straton wrote in a research that the key question for Lululemon’s shares was, “What’s the right multiple for a premium softlines retail asset with decelerating fundamentals?”
It’s the kind of question that’s new to Lululemon, and dangerous as the company has spent so long going from strength to strength.
In the end, a company’s stock is really only worth what someone’s willing to pay for it. And it will spell trouble if the Wall Street crowd shifts and people stop believing that Lululemon’s shares and debts are worth 15-times EBITDA — a valuation on par with LVMH Moët Hennessy Louis Vuitton.
Straton remains a believer and maintained an “overweight” rating on the stock.
“Lululemon is a long-term top-line grower, supported by compelling secular tailwinds (e.g., performance/athleisure focus), a market share gain opportunity and credible future revenue drivers (e.g., international expansion, men’s and product innovation/expansion into new categories),” the analyst said.
A Lululemon store.
George Chinsee for WWD
Big companies always have their critics, but Lululemon also has a curious heckler in founder Chip Wilson, who left as CEO in 2013 after drawing public ire for suggesting that some women’s bodies are not suited for the company’s leggings, among other things. Lately, Willson has been banging the drum, claiming Lululemon has drifted too far from its technical roots.
“Lululemon was built up to be an anti-Gap,” Wilson told Forbes recently. “It was technical and it was changing its styling every year, moving forward and thinking about functional fabrics and how it enhances people’s lives.”
He argued that the company is pulling in “bad profits,” selling looks, particularly in men’s, that are more casual than technical.
It’s a line of criticism that highlights a series of questions for Lululemon.
Can it be both big and pure? More desirable and more ubiquitous? And will Wall Street wait around if that trajectory isn’t straight up?
Winning is always nice, but in the high-stakes game of big fashion, it means the bar is only set that much higher.
The Bottom Line is a business analysis column written by Evan Clark, deputy managing editor, who has covered the fashion industry since 2000. It appears every other Thursday.
