A woman jogs past a Lululemon store.
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Lululemon sets high growth targets for the next five years and presents analysts with exactly how it plans to achieve it. But not everyone on Wall Street is sold.
Lululemon shares fell 4.8% on Wednesday after the leggings maker announced it was aiming to double its annual revenue by 2026 to $ 12.5 billion. The stock fell more than 1% in afternoon trading on Thursday. Within its five-year plan, the retailer expects that its men’s business will double, its e-commerce sales will double, and that its international revenue will quadruple from the 2021 level by 2026.
The company also announced the upcoming debut of a new membership model centered around fitness classes, which could serve as yet another potential revenue stream outside its core clothing arm.
At least one analyst is concerned about potential hiccups in Lululemon’s ambitious plan due to the ongoing global supply chain disruption and inflationary pressures weighing on consumers. Following a recent rise in retailer shares, others believe investors may get a little overwhelmed away from Wednesday’s presentation.
Jefferies analyst Randal Konik said in a note to customers on Thursday that Lululemon’s plan “will require an increased level of execution capability”, as well as stability in the broader macroeconomic environment, which may be difficult to achieve.
Konik has a hold rating on Lululemon shares and a price target of $ 375. The stock eventually traded closer to $ 380.
Konik also said that Lululemon’s recent push into the footwear category could prove to be a bad idea given all the competition already in the room, and that it could end up weighing profit margins. (Leaders said Wednesday that the launch, which starts with running shoes for women, has gotten off to a strong start, but that they did not offer specific sales figures.)
While Konik welcomed the company’s new membership offer as a way to create more loyal customers, he reiterated his concerns about Mirror, the home fitness business that Lululemon bought for $ 500 million in 2020. Lululemon folds the training content on the Mirror platform into its $ 39 -per-month membership plan.
“Our biggest concern is the slowdown in unit sales when consumers return to gyms,” Konik said of the Mirror. “We think Lululemon will have a hard time expanding the installed base in the future.”
Bernstein analyst Aneesha Sherman said she remains cautious, especially regarding Lululemon’s ability to increase gross margins, given the growing role that international sales will play in the company’s broader strategy.
In the past, Lululemon has expanded abroad in a “scattered” and expensive way, which has resulted in unprofitable growth, she wrote in a note to customers.
Lululemon aims to grow its international business so that by 2026 it will be the size that the North American business was in 2020, executives said. And should the men’s category double sales over the next five years, as the company predicted, it would be bigger than its women’s department was just two years ago.
Sherman has an underperforming rating on Lululemon with a price target of $ 280.
“It’s not like we do not like the company – with a high quality product, a super loyal following and a good management team, it has a good foundation,” she said. “But the growth trend for core products is slowing, and the business model lent itself to zero margin upward.”
Kimberly Greenberger, an analyst at Morgan Stanley, says Lululemon’s financial goals may not be that ambitious – but that’s actually the problem.
In a note to customers on Thursday, she wrote that Lululemon’s financial targets appear to be achievable and in line with the high bar that Wall Street has set for the sportswear retailer in light of its success compared to other apparel companies during the coronavirus pandemic.
But given the rise in Lululemon shares ahead of Wednesday, she said investors could get away unhappy with the 2026 targets.
Lululemon’s share has risen about 25% from a month ago. When the retailer reported its fourth-quarter financial results on March 29, it offered a better-than-expected outlook for the current year, which Greenberger said may prove conservative.
For 2022, Lululemon expects revenue of between $ 7.49 billion and $ 7.615 billion, with earnings per share in the range of $ 9.15 to $ 9.35.
“Most of the long-term goals already seemed to be built into street numbers,” Greenberger said.
Greenberger has a balanced rating on the stock with a price target of $ 339.
At the heart of Lululemon’s plan will be product innovation, including investing in new equipment for activities such as golf and hiking, outside of the yoga clothes it is best known for.
CEO Calvin McDonald said Wednesday that he believes the company is still in the “early stages” of its growth, citing the fact that Lululemon has already doubled its sales from 2018 to 2021.
“The opportunity is really to keep doing what we do. It works. It resonates,” McDonald said.