Lululemon

Too hard for me...

Lululemon has had a steep decline recently. It’s currently trading right around $300, after being as high as $516 at the end of last year. Lulu has been a great stock, returning about 12.5% a year on average since IPO.

They’ve grown revenue and earnings attractively:

They’re profitable, with high and stable margins:

Management has done a great job - the balance sheet has a net cash position, and ROIC hasn’t been below 25% in a decade.

So what’s the problem?

There are a few. Let’s go through them quickly, one by one.

Slower Growth

In March, management gave guidance that fell short of what analysts were expecting. The main concern is that growth is slowing in the Americas, which is Lululemon’s most important market. It’s worth noting that they are still seeing significant growth in Asia.

Management Changes

Adding to the growth concerns, earlier this month Sun Choe, Lululemon’s Chief Product Officer resigned. In conjunction with this, the company announced it was re-organizing the management structure.

Concerns Around Competition

Lululemon’s high profitability has invited new entrants into the market like Alo, Vuori, Athleta, and Calia.

My Opinion

I think Lululemon has a great brand. I think the concerns about competition are overblown.

Lulu has proprietary fabrics that the other brands can't quite match. I have friends who are professional yoga instructors, dancers and dance instructors that wear Lululemon all the time. They all tell me it's incredibly comfortable and durable. That it lasts much longer than clothing from other brands.

I think Lululemon will be fine over the next few years. But I’m not buying this dip.

What stops me from investing in Lulu is the fact that I have absolutely no confidence in my ability to predict fashion trends in 5 or 10 years.

Think of a decade, and you can picture the fashion trends - the 70's, 80's, etc. I have no reason to believe that fashion trends won't change at some point in the next decade and leave Lululemon behind. Yes, they'll still sell some clothing to people for yoga classes, to run in, etc. but if it is no longer fashionable to walk your dog or go to the coffee shop in athleisure wear, I can't see the growth continuing in the future as it has in the past.

I have no reason to believe that in 20 years, when the frat houses throw a 2020’s theme party that the girls won’t show up like this:

And like this:

Maybe Lululemon will adapt to changing style trends. They have sold a bunch of belt bags after all. But I can’t predict that. I don’t know if Lululemon will be the next Nike or if all those leggings will end up in a pile with the Jordache jeans, Swatches, Members Only Jackets, Tamagotchi pets, LA Gear sneakers, and Hypercolor t-shirts.

Forced to guess, I’d say the most likely outcome is that Lululemon still exists in 20 years. I think they’ll be selling quality clothing to people who practice yoga, and to go to the gym in, but I don’t think everyone will still be buying one of everything they make in every color.

For me this just fell into the “too hard” pile.

Because I can’t predict that they’ll be bigger in 10 years than they are now, I’m not going to waste time on valuation, or diving further into the company. I’m going to pass on Lulu and find something I’m more sure about. Instead of jumping over 6-foot bars, I’ll keep looking for a 6-inch high one to step over.