LULU - Lululemon: Waiting For Better Near-Term Visibility
2024-06-14 04:37:54 ET
Summary
- Lululemon topped estimates in Q1 and increased its EPS guidance for FY24E. Yet, the core North America division posted flattish same-store sales.
- Near-term concerns seem to be largely attributed to strategic missteps, with Q2 results either confirming or refuting this thesis.
- Despite shares trading at a discount, the market may remain cautious, waiting for greater conviction that the company can sustain growth in core regions. Until then, a re-rate is unlikely.
Investment thesis
Lululemon ( LULU )(LULU:CA) operates in the athleisure segment, which has been experiencing high growth, largely due to secular trends in wellness. It does so through a unique business model that allows for greater engagement with customers. Notwithstanding market concerns over growth decelerating in its core North America market (same-store sales were flattish YOY in this geography), this seems to be attributed to strategic missteps in the near-term, with management already addressing the issues and indicating continued strong momentum overseas and a robust pipeline of innovation for 2H24E. Despite Lululemon topping estimates in Q1 and increasing the EPS guidance for FY24E, the stock continues to trade at a large discount. Although I think the de-rate may have been excessive, I believe the market will remain on the sidelines, waiting for greater conviction that the company can sustain strong growth in core regions vis-à-vis heightened competition and soft macro. Until then, I don't see any catalyst that would lead to a multiple re-rate. In fact, I think it would be more prudent to wait until Q2 to confirm the thesis that the soft performance in North America in Q1 was a one-off.