Lululemon: Stretching Legs Internationally

1 September 2023

Key Indicators

Source: Iress

Weekly Stocktake with Danyaal

Lululemon: Stretching Legs Internationally

Last week, Lululemon released their Q2 2023 results. Despite the slowdown in consumer spending due to the tough economic environment worldwide, Lululemon increased their revenue by 18% compared to the same period last year. For the quarter, sales in the US accounted for 64% of total sales. The gross margin and net income margin for Lululemon came in at 58.8% and 15.4%, respectively. Lululemon’s price to earnings ratio closed at 52.5 on Friday. This is still quite a high valuation.

Lululemon is an athleisure retailer and has a more established presence in the US compared to other parts of the world. However, their growth outside the US is much higher at 52% versus 11% in the US. The international sales surge was primarily fuelled by a notable revenue increase in China, which witnessed a 61% growth rate. China currently boasts the second-largest number of Lululemon stores, totalling 126 as of the end of July 2023. These stores in China tend to be smaller, and the company offers its products at lower prices in response to the smaller average wallet size of customers in the region. Consequently, the average revenue per store in China is lower, currently standing at $2.2 million per a store for the quarter, compared to the US, where the average is $3.9 million.

The stores serve as essential platforms for Lululemon to showcase their products and create unique user experiences for customers. Notably their direct-to-consumer segment has become increasingly significant, accounting for 40% of their total sales. Revenue derived from this segment increased by 15% compared to the same quarter last year, while revenue from their physical stores grew by 21%. The operating income margin for the direct-to-consumer segment is higher at 42%, whereas the stores segment has an operating income margin of 30%.

Lululemon operates in a highly competitive landscape, facing rivals such as Nike and other legacy luxury fashion companies such as Louis Vuitton (LVMH). Both Nike and LVMH boast well-established positions and robust balance sheets. Nevertheless, Lululemon’s relatively focused product line-up provides them with the potential to expand into diverse product categories. The barriers to entry in the retail world are comparatively lower than in other industries, meaning new potential competitors are coming into the market every day. Despite these challenges, Lululemon maintains a dedicated and loyal customer base. Customers repeatedly return to purchase their products due to the consistent quality they offer.

Lululemon is held in the Lunar BCI Worldwide Flexible Fund. Lululemon and LVMH are held by Lunar Capital’s Offshore Portfolio Clients.

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