Lululemon - Lunar Capital

Adobe or Not Adobe

Adobe is a digital-media company that creates and sells products and tools that are primarily suited towards the creative economy. Their products include Photoshop and Lightroom, which are used to alter images, Premiere Pro, which is the standard video editing tool, and Adobe Document Reader, which allows people to view and export a standardized version of a digital document. There are free versions of their products, but Adobe makes its money from charging users a subscription fee to access all the products’ features.

Two weeks ago, Adobe released their Q2 2024 results. Revenue for the quarter was $5.31 billion, up 10% year on year. And operating income was $1.89 billion, up 16% year on year. The table below is a snapshot from Adobe’s earnings slide, which shows their core driver of revenue: Digital Media (DMe). The Creative segment within DMe accounted for just under 59% of their total revenue this quarter. Creative grew just under 10% year on year – in line with their revenue growth.

Despite many of Adobe’s products being industry standard tools, they are facing an increasing number of headwinds from both competitors and regulators.

In 2022, Adobe agreed to buy Figma (an interface design tool) for $20 billion. At the time, the deal placed an astronomical 50x revenue valuation on Figma. The deal faced regulatory scrutiny in the EU and was therefore cancelled before it could be completed. Adobe had to pay Figma a cancellation fee of $1 billion. Adobe is now being sued in the US, as the Federal Trade Commission (FTC) claims that Adobe makes it too difficult for users to unsubscribe from their products.

Despite Adobe adding generative AI layers to their products, they are facing intense competition from the likes of Microsoft-backed OpenAI. OpenAI has many tools that directly compete with Adobe’s tools, allowing people to generate and edit texts and images using generative AI.

Adobe, once a gold standard, could be one of the first victims in the new generative AI world.

Security Held In:

Security

Lunar Capital BCI Worldwide Flexible Fund

Lunar Capital Offshore Portfolio Clients

Security

Adobe

Lunar Capital BCI Worldwide Flexible Fund

Lunar Capital Offshore Portfolio Clients

Security

Microsoft

Lunar Capital BCI Worldwide Flexible Fund

Lunar Capital Offshore Portfolio Clients

Security

Inditex

Lunar Capital BCI Worldwide Flexible Fund

Lunar Capital Offshore Portfolio Clients

Key Indicators

Index / Fund / Rate

Start of Year

Last Week

This Week

% Change YTD

Index / Fund / Rate

Lunar BCI WW Flexible Fund

Start of Year

188.33

Last Week

212.26

This Week

212.51

% Change YTD

12.84%

Index / Fund / Rate

JSE ALSI

Start of Year

76 893

Last Week

77 054

This Week

79 768

% Change YTD

3.74%

Index / Fund / Rate

NASDAQ Composite

Start of Year

15 011

Last Week

17 689

This Week

17 689

% Change YTD

17.84%

Index / Fund / Rate

S&P 500

Start of Year

4 770

Last Week

5 432

This Week

5 465

% Change YTD

14.57%

Index / Fund / Rate

Prime Lending Rate

Start of Year

11.75%

Last Week

11.75%

This Week

11.75%

% Change YTD

0.00%

Index / Fund / Rate

USD/ZAR

Start of Year

18.30

Last Week

18.38

This Week

17.95

% Change YTD

-1.91%

Index / Fund / Rate

EUR/ZAR

Start of Year

20.17

Last Week

19.69

This Week

19.21

% Change YTD

-4.76%

Index / Fund / Rate

Brent Crude ($'barrel)

Start of Year

76.97

Last Week

82.56

This Week

85.07

% Change YTD

10.52%

Source: Iress

Click here to access your account to view statements, obtain tax certificates, add or make changes to your investments.

Our email address is: [email protected]

Disclosures
Lunar Capital (Pty) Ltd is a registered Financial Services Provider. FSP (46567)
Read our full Disclosure statement: https://lunarcapital.co.za/disclosures/
Our Privacy Notice: https://lunarcapital.co.za/privacy-policy/
The Lunar BCI Worldwide Flexible Fund Fact Sheet can be read here.
This stocktake is prepared for the clients of Lunar Capital (Pty) Ltd. This stocktake does not constitute financial advice and is generated for information purposes only.

Adobe or Not Adobe Read More »

A Day out Shopping

Weekly Stocktake / By VCS Agency

Lululemon, the athleisure brand, and Inditex (owner of fashion brands such as ZARA, Oysho, and others) primarily share one similarity: they both make clothes. However, these brands are quite different in terms of their target audience, operational methods, and growth stages.

Lululemon, founded in Vancouver, initially made yoga clothing before expanding into other types of athleisure for various sports. Lululemon has just over 700 stores around the world. Lululemon targets the upper-income segment, focusing on creating high-quality products primarily for women. This approach contrasts with other major athleisure brands like Nike and Adidas. Lululemon also sponsors local trainers and influencers, believing they have a closer connection with their community compared to big stars. Lululemon generally sets trends for each season, attempting to design and produce enough to meet the needs of its client base.

Inditex, on the other hand, operates quite differently. Catering to middle and upper-middle income groups, they have just under 7,300 stores worldwide. Inditex’s biggest brand, ZARA, focuses on offering customers the latest trends. ZARA uses a Just-in-Time vertical integration method. Their scouts attend fashion shows to identify trends, which are then sent to designers. These designs are quickly produced in factories and appear on shelves within 2-3 weeks. Depending on demand, ZARA can easily ramp up or scale down production, producing closer to what is actually needed. This results in there being just enough items in their stores to meet demand.

Despite Inditex being just under 4 times bigger than Lululemon in terms of market cap, the graph below shows how similar their gross and operating margins are. The also both have a PE ratio of around 25.

Margin Levels for Lululemon and Inditex

Last week, Lululemon and Inditex released their respective Q1 2024 results. Lululemon’s revenue for the quarter was $2.2 billion, up 10% year-on-year, while operating income was $432.6 million, up 7.7% year-on-year. Lululemon attributed the weakness in their sales growth to a limited colour range in certain women’s products in the US, missing an opportunity to meet demand. Combined with slowing overall demand in the US and Europe, heightened competition in the athleisure space, and the missed opportunity, Lululemon’s stock price has decreased by over 35% year-to-date.

Inditex, on the other hand, had a revenue of €8.2 billion for the quarter, up 7.1% year-on-year. While their operating income was €1.6 billion for the quarter, up 10.3% year-on-year. Inditex expressed that they are planning to spend €1.8 billion, over the next two years, on their supply chain as they look to bolster up their e-commerce offering, while also maintaining their physical presence with their stores.

Security Held In:

Security

Lunar Capital BCI Worldwide Flexible Fund

Lunar Capital Offshore Portfolio Clients

Security

Lululemon

Lunar Capital BCI Worldwide Flexible Fund

Lunar Capital Offshore Portfolio Clients

Security

Inditex

Lunar Capital BCI Worldwide Flexible Fund

Lunar Capital Offshore Portfolio Clients

Security

Inditex

Lunar Capital BCI Worldwide Flexible Fund

Lunar Capital Offshore Portfolio Clients

Key Indicators

Index / Fund / Rate

Start of Year

Last Week

This Week

% Change YTD

Index / Fund / Rate

Lunar BCI WW Flexible Fund

Start of Year

188.33

Last Week

208.29

This Week

214.80

% Change YTD

14.06%

Index / Fund / Rate

JSE ALSI

Start of Year

76 893

Last Week

76 704

This Week

76 852

% Change YTD

-0.05%

Index / Fund / Rate

NASDAQ Composite

Start of Year

15 011

Last Week

16 735

This Week

17 133

% Change YTD

14.13%

Index / Fund / Rate

S&P 500

Start of Year

4 770

Last Week

5 278

This Week

5 347

% Change YTD

12.10%

Index / Fund / Rate

Prime Lending Rate

Start of Year

11.75%

Last Week

11.75%

This Week

11.75%

% Change YTD

0.00%

Index / Fund / Rate

USD/ZAR

Start of Year

18.30

Last Week

18.80

This Week

18.88

% Change YTD

3.17%

Index / Fund / Rate

EUR/ZAR

Start of Year

20.17

Last Week

20.40

This Week

20.42

% Change YTD

1.24%

Index / Fund / Rate

Brent Crude ($'barrel)

Start of Year

76.97

Last Week

81.31

This Week

79.51

% Change YTD

3.30%

Source: Iress

Click here to access your account to view statements, obtain tax certificates, add or make changes to your investments.

Our email address is: [email protected]

A Day out Shopping Read More »

Making Lululemon-ade

Weekly Stocktake / By VCS Agency

Last week, Lululemon, the Vancouver based athleisure company, released their Q4 2023 results. The yearly revenue increased by 18.5% to $9.6 billion, accompanied by an 81% increase in Lululemon’s net income to $1.5 billion. This surge in net income can be attributed mainly to a notable decrease in the 2023 impairment charge. In the preceding year, Lululemon faced an impairment charge of $407 million, whereas this year’s charge stands at $74 million. 2022’s impairment charge primarily comprises of the impairment of its investment in the home-workout product-range: “Mirror.”

The Americas segment, making up 79% of total sales, experienced a modest revenue increase of nearly 12%. In contrast, the international segment, representing the remaining 21% of sales, witnessed a robust 54% revenue surge. During the earnings call, management articulated their aspiration for the international segment to contribute 50% of sales in the future. They acknowledged a deceleration in the demand growth rate for their products in the Americas’ market. Consequently, they adjusted their annual sales growth projection to around the mid-teens. This adjustment led to a 15% decline in Lululemon’s share price on the day.

Lululemon is investing for growth, primarily targeting the expansion of its brand visibility and bolstering its presence in international markets, particularly in China, where demand for its products has been substantial. To enhance brand recognition, the company is focusing on sponsoring athletes and teams. Notably, they are backing the Canadian national team for the 2024 Summer Olympics. Lululemon intends to address underrepresented markets by opening around 10 stores in the US and 30 stores in other parts of the world.

Lululemon contends with lots of competition in the athleisure sector, including major players like Nike, as well as various niche athleisure brands. Lululemon is a luxury brand within this competitive landscape. Amidst heightened global economic uncertainty, consumers tend to slow down their spending on luxury goods.

Lululemon is held in the Lunar BCI Worldwide Flexible Fund. It is also held by Lunar Capital’s Offshore Portfolio clients.

Key Indicators

Index / Fund / Rate

Start of Year

Last Week

This Week

% Change YTD

Index / Fund / Rate

Lunar BCI WW Flexible Fund

Start of Year

188.33

Last Week

204.52

This Week

207.32

% Change YTD

10.08%

Index / Fund / Rate

JSE ALSI

Start of Year

76 893

Last Week

72 991

This Week

73 254

% Change YTD

-4.73%

Index / Fund / Rate

NASDAQ Composite

Start of Year

15 011

Last Week

15 973

This Week

16 429

% Change YTD

9.44%

Index / Fund / Rate

S&P 500

Start of Year

4 770

Last Week

5 117

This Week

5 234

% Change YTD

9.74%

Index / Fund / Rate

Prime Lending Rate

Start of Year

11.75%

Last Week

11.75%

This Week

11.75%

% Change YTD

0.00%

Index / Fund / Rate

USD/ZAR

Start of Year

18.30

Last Week

20.44

This Week

19.00

% Change YTD

3.83%

Index / Fund / Rate

EUR/ZAR

Start of Year

20.17

Last Week

85.27

This Week

20.62

% Change YTD

2.23%

Index / Fund / Rate

Brent Crude ($'barrel)

Start of Year

76.97

Last Week

81.82

This Week

85.58

% Change YTD

11.19%

Source: Iress

Click here to access your account to view statements, obtain tax certificates, add or make changes to your investments.

Our email address is: [email protected]

Making Lululemon-ade Read More »

Lululemon: Three x 2

Weekly Stocktake / By VCS Agency

Lululemon’s three growth drivers are product innovation, guest experience and market expansion in athleisure wear. It aims to double (X2) its digital and men’s wear business to achieve a quadruple growth in its non-US sales by 2025. Lululemon is renowned for its athleisure designs catering to various sports codes.

Last week, Lululemon, a business owned by Lunar Capital, unveiled its Q3 2023 results, reported a notable 19% surge in revenue, reaching $2.2 billion for the quarter. Sales in North America saw a 12% increase, while international sales increased by 49%. The latter was mainly attributed to sales in China, which has recently encouraged growth in its economy through favourable policies.

Lululemon’s gross margin for the quarter increased by 110 basis points to achieve 57%. However, there was a 4% decrease in income from operations, settling at $338.1 million. This dip in profit was predominantly a result of an impairment charge incurred on their Mirror product range. Lululemon have decided to discontinue the sale of the hardware associated to the Mirror. Mirror is a subscription service to access thousands of streaming exercises. This service will continue in partnership with Peloton.

Lululemon’s stock price has surged 51% this year, reaching a share price $489.64 per share and boasting a market cap of $61.96 billion as of Friday. Several factors have contributed to the positive sentiment surrounding Lululemon:

Diverse Product Pipeline: Lululemon exhibits a clear product roadmap, introducing a variety of new products targeting different sports codes and children’s wear.
Robust Online Presence: For the quarter; 41% of Lululemon’s sales were conducted online. Scaling online sales has the potential to yield a higher operating margin compared to traditional in-store sales.
Thriving Asian Market: Lululemon has established a robust presence in the international market, particularly in Asia, where a growing demand for their products is evident.
Adaptability to Market Trends: The recent emergence of weight-loss drugs like Ozempic may benefit athleisure companies like Lululemon, as these clients need to replace their wardrobes and exercise more. Lululemon, along with other clothing brands, stands to benefit from this trend.

Lululemon is currently enjoying a favourable position and it appears that its Three x 2 strategy is working despite facing intense competition in the market. The challenges come not only from established competitors like Nike, who boast a stronger balance sheet, but also from emerging players entering the field. These newcomers have the potential to introduce novel styles and trends that might resonate more effectively with customers. Despite the competitive landscape, Lululemon’s strengths and strategic advantages position it well in navigating the dynamic and evolving nature of the market.

Lululemon is held in the Lunar BCI Worldwide Flexible fund. It is also held by Lunar Capital’s Offshore Portfolio clients.

This marks the final stocktake for the year, and we’ll resume our updates in January. Our team will continue monitoring the market and the portfolios we manage; and supporting our clients.

We extend our heartfelt gratitude for an incredible year and wish all our clients, staff and partners a joyful and safe festive season.

Key Indicators

Index / Fund / Rate

Start of Year

Last Week

This Week

% Change YTD

Index / Fund / Rate

Lunar BCI WW Flexible Fund

Start of Year

141.43

Last Week

183.29

This Week

184.35

% Change YTD

30.35%

Index / Fund / Rate

JSE ALSI

Start of Year

73 049

Last Week

75 534

This Week

73 791

% Change YTD

1.02%

Index / Fund / Rate

NASDAQ Composite

Start of Year

10 467

Last Week

14 305

This Week

14 404

% Change YTD

37.61%

Index / Fund / Rate

S&P 500

Start of Year

3 840

Last Week

4 595

This Week

4 605

% Change YTD

19.91%

Index / Fund / Rate

Prime Lending Rate

Start of Year

10.50%

Last Week

11.75%

This Week

11.75%

% Change YTD

11.90%

Index / Fund / Rate

USD/ZAR

Start of Year

16.98

Last Week

18.63

This Week

18.97

% Change YTD

11.72%

Index / Fund / Rate

EUR/ZAR

Start of Year

18.44

Last Week

20.29

This Week

20.42

% Change YTD

10.74%

Index / Fund / Rate

Brent Crude ($'barrel)

Start of Year

85.95

Last Week

79.26

This Week

75.81

% Change YTD

-11.80%

Source: Iress

Click here to access your account to view statements, obtain tax certificates, add or make changes to your investments.

Our email address is: [email protected]

Lululemon: Three x 2 Read More »