2024 has proven challenging for athleisure apparel giant Lululemon Athletica (NASDAQ: LULU).
The company’s stock has plunged by over 51.4% year to date as of 26 July 2024, making it one of the worst performers in the S&P 500 Index (^SPX) this year.
Recently, the brand known for its trendy yoga wear hit a 52-week low, raising concerns among investors.
Should investors be concerned about Lululemon’s falling share price, or could this be a great opportunity to accumulate shares on the cheap?
Is Lululemon a good investment?
Let us analyse Lululemon’s earnings report for the first quarter of fiscal 2024 (Q1 FY2024) ending 28 April 2024.
For Q1 FY2024, the company reported a total revenue of US$2.2 billion, representing a 10.4% year on year increase.
Net profit rose by 10.7% year on year, totaling US$321.4 million.
This overall growth in top and bottom line performances was attributed to strong international sales, which surged by 25% year on year, largely driven by China.
Lululemon expects total revenue for fiscal year 2024 to range from US$10.7 billion to US$10.8 billion, indicating a year on year growth of 10% to 11%.
Currently, international sales make up roughly 21% of the company’s total sales. Lululemon is targeting international sales to make up half of total sales, suggesting a significant runway for further growth.
This ambition aligns with Lululemon’s “Power of Three x2” growth plan, which aims to double 2021’s full-year revenue of US$6.25 billion to US$12.5 billion by 2026.
Under the “Power of Three x2” plan, Lululemon has outlined a growth strategy aiming to double both its men’s and e-commerce sales, while also setting a goal to quadruple international sales.
The company plans to achieve these ambitious targets by focusing on three key areas: innovative products, enhancing the guest experience, and expanding its international presence.
Furthermore, Lululemon maintains a robust balance sheet.
The company has US$1.9 billion of cash and cash equivalents and is debt-free, thus offering investors confidence that it can tide through the current era of higher interest rates.
However, the main concern for investors is Lululemon’s competitive advantage.
After all, athleisure, which stands for “athletic leisure”, is a highly competitive industry with low barriers to entry.
The athleisure market is filled with major brands such as Nike (NYSE: NKE) and Adidas (ETR: ADS).
Upcoming athleisure brands such as Alo Yoga and Vuori are also vying for Lululemon’s market share.
However, Lululemon has taken actions to defend its market share.
Lululemon’s strategic expansion beyond America and Canada was a calculated move to capture market share before these new brands can establish a firm market presence.
The company is also known for its quality.
A survey on athleisure wear done by CivicScience found that the general population in the US considers Lululemon as the most preferred brand for athleisure wear.
Furthermore, both pilates and yoga have grown in popularity in recent years and are expected to increase demand for their associated apparel.
With a reputation for quality and the growing trend in low-impact exercises, Lululemon is poised to capture a larger market share abroad as the company accelerates its international expansion plans.
These moves should help Lululemon’s shares to eventually rebound.
Other companies to consider
While Lululemon remains a solid investment option, considering the intense competition in the athleisure market, investors might consider exploring alternatives.
One possible investment idea for fashion apparel relates to well-established brands which benefit from stellar reputations and have solid market share that are difficult for newcomers to dislodge.
Alternatively, fashion department stores offer a diversified risk profile by featuring an assortment of brands under one roof.
Ralph Lauren (NYSE: RL)
Ralph Lauren, a global leader in the designing, manufacturing, marketing, and distribution of premium lifestyle goods, is most commonly known for its clothing lines.
While considered a luxury brand, it also caters to a broader market with its more affordable clothing brand, Polo Ralph Lauren.
Its luxury brand, Ralph Lauren Purple Label, features items such as T-shirts retailing at US$500 onwards.
This allows the company to serve two separate markets and helps to broaden its appeal.
Ralph Lauren’s main selling point is its celebrated “All-American” identity, a brand image meticulously crafted by its founder over five decades.
It has fully embraced this identity as the attire designer for the US Olympics team since 2008.
For fiscal year 2024 ending 31 March 2024 (FY2024), Ralph Lauren generated US$6.6 billion in total sales, marking a modest 3% year on year increase.
This sales growth was primarily driven by a 10% year on year revenue increase in Asia.
Net profit stood at US$646 million, an impressive 23.5% year on year jump, buoyed by improved margins in its Europe and Asia business and a lower effective tax rate.
Looking ahead to fiscal year 2025 (FY2025), Ralph Lauren forecasts revenue to grow in the low single digits.
However, the company looks forward to better margins, citing favourable cotton prices and increased operational efficiency.
Unlike Lululemon, which does not distribute dividends, Ralph Lauren has maintained a consistent dividend payout for the past 22 years.
The company declared a 10% increase in its quarterly dividend to US$0.825 per share for FY2025, amounting to an annualised US$3.30 a share.
TJX Companies (NYSE: TJX)
TJX Companies is a leading off-price retailer of apparel and home fashion in both the US and around the world.
It operates well-known brands such as TJ Maxx and Marshalls.
These stores offer consumers a range of products from everyday items to designer brands at prices well below those of traditional full-price retailers.
TJX secures these low prices by seizing opportunities such as overstocked merchandise, clearout sales, and department store order cancellations.
For the first quarter of FY2025 (1Q FY2025), TJX Companies delivered a solid set of earnings.
Revenue increased by 6% year on year to US$12.5 billion while net profit shot up by 20% year on year to US$1.1 billion.
This profit growth was bolstered by an improvement in gross margins of 1.1 percentage points, driven by lower freight costs and favourable pricing.
For FY2025, TJX Companies expects net revenue to stay consistent at 3% year on year growth but raised its outlook for pretax profit margin to 11%.
It has also recently announced a quarterly dividend of US$0.375 a share, a 13% year on year increase.
Remarkably, TJX Companies has consistently raised its quarterly dividend since its initial public offering in 1987.
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Disclosure: Aw Kai Rui does not own any of the stocks mentioned in this article.
