This clothing brand’s continued success is already priced in
Consumers are pulling back on spending, hurting premium athletic brands like Nike.
In contrast, Lululemon (LULU) continues to thrive through frequent product refreshes and international growth, maintaining strong profitability.
However, the market already anticipates its steady success, and with rising competition and shifting consumer habits, further upside may be limited despite its robust performance.
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Consumers are tightening their belts, and it’s hitting the athletic apparel industry hard.
Recent data shows U.S. financial optimism at its lowest since late 2023, with savings confidence dropping sharply.
Nearly half of Americans now feel worse about their financial health than they did six months ago.
For brands built on premium pricing, this trend spells trouble, with shoppers skipping $150 sneakers for cheaper alternatives or secondhand options.
Nike’s (NKE) latest earnings proof to this. Shares have sunk more than 15% since the start of the month, hitting a five-year low, after the company warned of a “mid-teens” sales decline this quarter.
Even its iconic Jordan brand stumbled, with sales slipping and classic sneaker revenue falling by double digits.
However, not all athletic apparel companies are struggling…
Lululemon (LULU) has changed the way people dress for everyday workouts and leisure, and it continues to build on that strong foundation.
The company started by offering workout gear that was both stylish and comfortable, and over time, it became known for its quality and smart product updates.
Today, Lululemon remains a market leader by focusing on product development and growing its market share both at home and abroad.
The brand keeps its customers interested by introducing new products every season. This approach, called “seasonal newness,” means that shoppers always have fresh choices.
Lululemon listens to what its customers want and makes small changes to improve the style and function of its apparel.
This steady flow of new products helps keep the business strong even when the market becomes more competitive.
At home in North America, the market has become more mature, which makes growth a bit slower. However, Lululemon is not relying solely on its American customers.
The company has seen good results in international markets, especially in Asia. In countries like China, where the middle class is growing, there is a strong demand for high-quality athletic wear.
This international push helps balance the slower growth in the U.S. and gives the company a broader base of customers.
Recent earnings prove Lululemon’s strength, with double digit growth in 11 quarters out of the last 12 quarters.
This performance resulted in the company achieving consistent Uniform return on assets ”ROA” levels of around 30% since 2019, well above the corporate average.
However, the market is quite familiar with this business, and they expect it to sustain its stable profitability for years to come.
We can see what the market thinks through our Embedded Expectations Analysis (“EEA”) framework.
The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.
In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.
At the current stock price, the market predicts that the company’s Uniform ROA will stay around 35%.
Even though Lululemon is strong and has a solid track record, our EEA shows that the market already fully understands its strengths.
Furthermore, even with its success, the company faces some challenges. One of them is increased competition, especially from local brands in markets like China.
These competitors often offer similar styles at lower prices. This means Lululemon has to work hard to keep its quality and brand appeal high without losing its profit margins.
Another challenge comes from changing consumer habits. More buyers are now looking for better deals, and some are open to trying lesser-known brands if they offer similar quality at a lower price.
Even if Lululemon manages to overcome these issues, investors have priced in the success and steady growth of the business, which means that further upside will be hard to come by.
Best regards,
Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research
