Wall Street questions Lululemon’s 2026 financial goals

A woman passes a Lululemon store.

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Lululemon it is setting ambitious targets for growth over the next five years and showing analysts exactly how it intends to achieve them. But not everyone on Wall Street is sold.

Shares in Lululemon lost 4.8% on Wednesday after the leggings maker announced it aims to double its annual revenue by 2026 to $ 12.5 billion. The stock was up about 1% in early Thursday trading. Under its five-year plan, the retailer expects its men’s business to double, its e-commerce sales will double, and its international revenue will quadruple from 2021 levels by 2026.

The company also announced the upcoming debut of a new subscription model focused on fitness classeswhich could serve as another potential revenue stream outside the main apparel branch.

At least one analyst is concerned about the potential setbacks in Lululemon’s ambitious project given the continued disruption of the global supply chain and the inflationary pressures that are weighing on consumers. Following a recent hike in the retailer’s stock, others believe investors may come out of Wednesday’s presentation a little disappointed.

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Jefferies analyst Randal Konik said in a note to clients Thursday that Lululemon’s plan “will require an additional level of execution skill,” as well as stability in the broader macroeconomic environment, which may be difficult to achieve.

Konik has a hold rating on Lululemon stock and a target price of $ 375. The stock was last trading closer to $ 385.

Konik also said Lululemon’s recent push into the footwear category it could turn out to be a bad idea, given all the competition already present in the space, and which could end up weighing on the profit margins. (Executives said Wednesday that the launch, starting with women’s running shoes, got off to a great start, but didn’t offer specific sales numbers.)

While Konik applauded the company’s new subscription offerings as a way to build more loyal customers, he reiterated his concerns on Mirror, the home fitness business that Lululemon acquired for $ 500 million in 2020. Lululemon is integrating training content on the Mirror platform into its $ 39 per month subscription plan.

“Our main concern is the slowdown in unit sales when consumers return to gyms,” Konik said of Mirror. “We believe Lululemon will have a hard time expanding the installed base in the future.”

‘scattershot’

Bernstein analyst Aneesha Sherman said she remains cautious, particularly about Lululemon’s ability to increase gross margins, given the growing role international sales will play in the company’s broader strategy.

In the past, Lululemon has expanded overseas in a “scattershot” and costly fashion, resulting in unprofitable growth, he wrote in a note to customers.

Lululemon aims to grow its international business so that by 2026 it will be the size of the business in North America in 2020, the executives said. And if the men’s category were to double sales in the next five years, as the company predicted, it would be bigger than the women’s division was just two years ago.

Sherman has an “underperform” rating on Lululemon, with a price target of $ 280.

“It’s not that we don’t like the company – with a high quality product, a super loyal following and a good management team, it has a good foundation,” he said. “But the growth trajectory of core products is slowing and the business model lent itself to a zero-margin upside.”

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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, he wrote that Lululemon’s financial goals appear to be achievable and in line with the high level Wall Street has set for the sportswear retailer in light of its success relative to other apparel businesses during the pandemic. coronavirus.

However, given the rush to Lululemon stock earlier than Wednesday, he said investors may be dissatisfied with their 2026 targets.

Lululemon’s stock is up about 25% from a month ago. When the retailer reported fiscal fourth quarter earnings results on March 29, it offered a better-than-expected outlook for the current year, which Greenberger says may prove conservative.

For 2022, Lululemon expects revenue of between $ 7.49 billion and $ 7.615 billion, with earnings per share between $ 9.15 and $ 9.35.

“Most of the long-term goals seemed to already be built into the street numbers,” Greenberger said.

Greenberger has an “equal weight” rating on the shares, 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 the yoga apparel it is best known for.

Chief Executive Calvin McDonald said Wednesday that he believes the company is still in the “first innings” of its growth, citing the fact that Lululemon has already doubled its sales from 2018 to 2021.

“The opportunity really is to keep doing what we’re doing. It works. It’s ringing,” McDonald said.