NONOF - Lululemon: Cutting Pounds Crafting Profits

2024-01-12 11:55:01 ET

Summary

• GLP-1 weight-loss drugs are impacting the pharmaceutical industry and external industries like apparel.
• Lululemon is expected to benefit from the demand for new clothes as people lose weight.
• The growing popularity of weight-loss drugs, particularly among women, could lead to increased sales for Lululemon.

Investment Thesis

In this article, I explore how GLP-1 weight-loss drugs, from Eli Lilly and Company ( LLY ) and Novo Nordisk A/S ( NVO ), have impacted people. While briefly discussing the significance of these drugs in the obesity management field, I will mainly dive into their influence on the apparel industry. I think Lululemon Athletica Inc. ( LULU ) will benefit greatly as people losing weight will see a need to purchase new, fitting attire. And there is notable data that emphasizes the women's market in weight loss drugs, which I thought was intriguing for a cross-industry analysis on Lululemon. So throughout this entire piece, you will find that I intertwine an analysis that highlights how these GLP-1 drugs tie to consumer spending and lifestyle choices across the athleisure market. I hope you enjoy reading this article as much as I enjoyed writing it, and please comment on what other industries you believe could be impacted due to weight-loss drugs.

Lululemon: Buy Rating

GLP-1 Drug Background and Outlook

Both Eli Lilly and Novo Nordisk have released weight-loss drugs and they have changed the pharmaceutical industry-- and the world. Both of their products have been on the market and are surging in demand. To discuss a little further, I believe the surge of interest is continuing to push the demand in this market where we are seeing upward movement. Analysts are predicting the weight loss drug market to reach $100 billion by the end of the decade. Goldman Sachs forecasted 15 million U.S. adults to be on obesity medications by 2030; the stakes are high and I suggest, with these numbers, that everyone take a piece of the investment pie. That could be in the sense of Eli Lilly and Novo Nordisk stock, but what about its impact on external industries. I am honing in on the apparel company, Lululemon as I think there is much to discuss (which we will cover in just a moment). But to wrap up this background on weight loss drugs, the growing demand and now increasing accessibility of the drugs, I think, will continue a bright future for 2024 and beyond.

One thing I would like to mention is the supply and demand of such drugs and what the companies are doing to address this. To note, there are current issues with supply. For example, Novo Nordisk's Wegovy and Eli Lilly's Mounjaro have faced supply constraints. However, the companies are actively working to scale up production to meet these demands. With research, I found an $8.3 billion investment from Novo Nordisk to expand manufacturing facilities, which is a clear indication to meet this growing demand-- something I am viewing as a general need for the overweight population. I think it was relevant for you to understand these things about GLP-1 drugs in order to fully comprehend our next section (I'm hoping that was great context). So you may be asking, 'How does this relate to Lululemon, an athleisure apparel company?" Well here we go, let me explain.

Impact On Lululemon: Need For New Clothes

The increasing popularity of GLP-1 drugs like Ozempic, Wegovy, and Zepbound is no doubt going to reshape consumer spending patterns. I find that if there is a continual uptick in weight loss drugs, which there already is a large demand and interest, it particularly will benefit athleisure brands such as Lululemon. This cross-industry, correlational shift is based on the impressive success stories and facts of major weight loss due to the drugs, precisely directed at overweight and diabetic patients. For context, according to a recent survey sent out to consumers, which was conducted by analysts at Stifel, it was found that 15% of the respondents are already using GLP-1 drugs, with an additional 21% showing interest. This widespread adoption is why we are diving into the apparel sector, as the survey signals a major shift in consumer spending.

What I find particularly interesting is how these changes in physical health are being projected to influence the habits of what you will soon purchase, but I see it as a no-brainer. If people lose weight and would rather keep the clothes that do not fit them, by all means go ahead, but I think predominantly individuals will need to buy some new garments (maybe a lot of them). But specifically, as people lose weight and gain confidence , their desire to update and enhance their wardrobes to a different style could be very likely. I think this is where Lululemon will gain significant sales. Based on Stifel's survey, it suggests that individuals experiencing weight loss are twice as likely to spend more on clothing. And it is directed at categories like athleisure, which aligns perfectly with Lululemon's product range.

Moreover, as these individuals, many of whom are probably women, embrace more active lifestyles in their better-feeling bodies, the demand for products that cater to this new lifestyle will surge. Those who hope to remain at their weight after losing it, will strive to exercise and stay in shape. Lululemon is known for its high-quality, stylish clothing that is more apt to be worn in confident bodies. With this knowledge so far, I think Lululemon is positioned to capture this growing market segment. From yoga pants to running gear, consumers who are increasingly health-conscious and motivated to maintain an active lifestyle will look to purchase some of this apparel. But not just any consumers, I want to directly point at women. I do this because I would like to add in some data that would further this thesis and analysis. The latest findings from the KFF poll illustrate a trend in this market, that is particularly relevant to Lululemon. The data shows that about 51% of women, especially those aged 30 to 64, are more likely to use prescription weight-loss drugs compared to 38% of men. Let alone, this is a great start for Lululemon investors because it's a top brand in the women's athleisure and wellness market, something that I speculate women will want to buy into after they lose weight and increase their confidence. Lululemon is catering to a growing market of women who strive for a health-conscious lifestyle, and with a need to update their wardrobes due to changing body shapes, Lululemon could see a spike in revenue.

If we think more broadly about the KFF findings, it suggests a trend of heightened health and body awareness among women, which I think aligns with Lululemon's brand ethos of promoting wellness and active lifestyles.

But there is more. Because as I look into this deeper, the obesity statistics reveal critical info that can be related to our analysis. It is found that women have a higher rate of severe obesity at 11.5%, compared to 6.9% among men. So what I interpret is that as women, especially those severely obese, turn to GLP-1 drugs for weight management and experience notable weight loss, their interest to purchase new clothes is likely. So, I think this factor is particularly significant for Lululemon's market potential. The company is renowned for its premium quality and stylish designs, and to women I think it definitely stands as an ideal choice as they begin a new health journey.

Ultimately, as women transition from severe obesity to healthier weights, the need for new clothes is prevalent. And I think that some will choose to align themselves with a brand like Lululemon for the reasons already mentioned, which would lead to the company's growth. This shift in consumer behavior due to the successful weight loss drugs is the key element that supports my buy thesis for Lululemon. By catering to a demographic that is making changes in their physique, Lululemon positions themselves for growth as its popularity rises among weight loss drugs.

Valuation

The first thing I would like to mention is that Lululemon has increased by +27.93% in the past 6 months and is up +55.62% over the last year. I think the stock's recent surge is relevant to keep in the back of our minds as we move on to valuation data. So let's dive into the three forward-looking metrics and its comparison to the sector's median.

To begin with, the Forward Price to Earnings (FWD P/E) ratio stands at an elevated 40.07 , a significant premium to the sector median of 17.00. A high P/E ratio can often indicate that investors are expecting higher earnings growth in the future compared to the broader sector. Seeking Alpha's grade of 'D-' suggests skepticism about the sustainability of this growth premium. Yet, in my view, this grade might not fully capture the company's unique growth drivers or market position which could justify such a valuation.

Moving on to the Forward Price to Sales (FWD P/S) ratio, the company's figure is 6.36, and standing much higher than the sector median of 0.91. This disparity, reflected in Seeking Alpha's 'F' grade, could initially raise flags about overvaluation. However, I interpret this metric as a sign of robust top-line growth potential and market confidence. The company could be in a phase of rapid expansion or innovating in ways that command higher sales multiples. I think these negative grades are something to see at first glance, but we should think intuitively about these 'overvalued metrics' as more of a higher-end expectation of the company, something that could totally be of premium.

Lastly, the Forward Price to Book (FWD P/B) ratio is at 15.84, far above the sector's 2.54 median. A high P/B ratio typically indicates that the market believes the company's assets are of higher quality and potential. Despite the 'F' grade from Seeking Alpha, I consider this a testament to the company's asset efficiency and its potential to generate superior returns on equity. Below I have depicted each of these metrics into a table for a better visualization.

In conclusion, while these metrics place the company at a steep valuation compared to the sector, they may not be red flags. I strongly believe in my thesis with a cross-industry analysis, so these could be green lights, signaling unique growth opportunities and a strong competitive edge in comparison to the rest of the field. These metrics, especially when they stand out against the sector average, highlight the importance of looking beyond the numbers to understand the underlying business quality and market expectations for the stock, which is more of my lens. I do strongly believe in momentum though- something that Lululemon does have. Like we talked about its recent surge and we can even relate this to Newton's law: that an object will continue to stay in motion or at rest until an external force acts. We can relate this to the stock market in a very simple way: momentum is our friend.

The Key Takeaway

The emergence of GLP-1 weight-loss drugs like those from Eli Lilly and Novo Nordisk is reshaping not only the pharmaceutical industry but also across various external industries. The key takeaway is that the specified drug companies are poised to make an increase in 2024 due to the growing demand. These drugs are making major impacts in the obesity management market, but I thought it was unique to note their influence among the apparel sector. I found that Lululemon could see a surge in demand as people who are losing weight will need better-fitting clothes; women specifically, will buy into a health-conscious brand because of significant changes in their confidence and lifestyle. I found this cross-industry analysis among health and various industries quite interesting. The studies, statistics, and correlational factors solidify my positive outlook on each of these companies, as the ties between health and consumer behavior are prevalent.

I highly recommend you comment below with your insights and engage with others' opinions. I will be interacting with you in the comment section. I hope you enjoyed the article!

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