Shares in Lululemon Athletica Inc. were up by more than 16 per cent on Friday after the company raised its full-year outlook on strong international sales, but one analyst says the company may face challenges growing its brand in the future.
Simeon Siegel, managing director of equity research at BMO Capital Markets, told BNN Bloomberg that Lululemon’s third quarter earnings release on Thursday has led many investors to reevaluate the stock, which is down more than 20 per cent in 2024.
“Today it’s moving a lot, it’s recapturing a lot, it’s squeezing a lot of shorts and it’s making people questions again that maybe it’s not on its way down, maybe it’s not on this negative inflection,” he said in a Friday interview.
But it’s important to look beneath the headline numbers and examine the Vancouver-based retailer’s core business, Siegel argued, noting that while the company saw strong third-quarter sales growth internationally, its U.S. business was flat.
“(Lululemon’s) U.S. business is underperforming the broader apparel group, and its gross margin’s underperforming the broader apparel group – I think those are two very important questions,” he said.
“It’s a very strong brand, it’s a big brand, but (we) also have to think about it from a stock (perspective) and we have to think about it relative to its competition.”
Shares in Lululemon were changing hands at just over US$400 in Friday afternoon trading on the Nasdaq.
Core growth
Siegel said that Lululemon has done well in recent years to expand its offerings to include accessories like cross body bags, but he noted that the company’s core product – leggings – is still the most important sales metric to watch.
“There is room to find that extra product but what you need at this size is to know that you have continued growth at your core,” he said.
“For the long term, you have to question, you have to ask, can Lululemon grow in the U.S., and can Lululemon grow its leggings? Or is it a very large business and now we’ve hit that level of maturity.”
Siegel added that he still believes Lululemon is a “compelling brand” and that “there’s nothing broken” about the company, but said he worries that “brands have a peak.”
He said that he and his team have found through research that most North American brands typically have $3 billion to $4 billion worth of “brand dollars” they can capture, and companies that stretch past that peak tend to come back down in “somewhat of a painful way.”
“Lululemon is well above that... I’m going to give them extra credit for their Canadian business which is incredibly strong in a way that other (U.S. companies) don’t have, but either way, you’ve still moved past that peak,” Siegel said.
“We are looking at a business that has compelling brand equity, I love the brand, but from a stock perspective and from a growth perspective I think we’ve seen the best days in the past.”
With files from Bloomberg News