Athleisure wear seller Lululemon Athletica (NASDAQ: LULU) was the belle of the ball during the Covid pandemic.
People stuck at home, especially women, liked wearing the company’s high-quality leggings and tops. That was for both athletic and leisure activity, hence the term “athleisure.” In addition to apparel, Lululemon sells shoes and accessories such as yoga mats.
In the last 21 months, however, the company has hit the skids. Its stock has plunged 55% year to date. Lululemon has faced multiple woes:
- Higher U.S. tariffs, including the elimination last month of the de minimis tariff exemption for shipments of $800 or less.
- Uninspiring product designs.
- Competition from newcomers such as Alo Yoga and Vuori.
- Inflation, which has increased the company’s costs and forced it to raise its own prices, pushing some customers away.
- Economic hardship for those who aren’t wealthy, making them reluctant to pay up for Lululemon’s products.
To be sure, it’s not as if the company is headed for oblivion. Its revenue rose a respectable 7% to $2.5 billion in the quarter ended Aug.3 from a year earlier. But net income dropped 5.6%. And Lululemon lowered its revenue and profit estimates for the year ending Feb. 1.
In the latest quarter, foreign sales gained 22%, including 25% in China, but sales in the U.S. were unchanged. That’s a problem because the Americas (U.S., Canada, where Lululemon is based, and Mexico) account for 70% of the company’s revenue.
Facing up to the facts
Unlike many corporations with serious headwinds, Lululemon isn’t in denial. Its CEO Calvin McDonald freely acknowledged its problems in the company’s earnings conference call Sept. 4.
Here’s a sample of his remarks:
- “While we continue to see positive momentum [overseas], we’re not happy with the results in the U.S. business.
- “We are facing yet another shift within the industry related to tariffs. The increased rates and removal of the de minimis provision have played a large part in our guidance reduction.
- “While [customers are] responding well to many of our new styles, they are not reacting as we had anticipated to the updated seasonal colors we brought into our core assortment.
- “We have let our product life cycles run too long within many of our core categories. We have become too predictable within our casual offerings and missed opportunities to create new trends.
- “Consumers are spending less on apparel overall, spending less in performance active wear and are being more selective in their purchases, seeking out truly new styles.”
What’s the long-term path?
Of course McDonald remains positive for the long term, as he thinks Lululemon can correct its errors and continue growing sales overseas. It certainly has a positive track record, tripling its sales over the past six years.
Some analysts have a positive outlook for the company. “Lululemon has a solid plan to expand its product assortment and geographic reach while building its core business,” wrote Morningstar analyst David Swartz.
But some are more pessimistic. The company’s negatives “create a lot less profitability in the near term, and a greater lack of clarity on how quickly trends rebound,” said William Blair analyst Sharon Zackfia, according to The Wall Street Journal.
So the jury is out as to which way Lululemon is headed.
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