Wall Street questions Lululemon’s 2026 financial targets

A woman runs past a Lululemon retail store.

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Lululemon is setting ambitious goals for growth over the next five years and telling analysts exactly how it plans to get there. But not everyone on Wall Street is sold.

Lululemon shares shed 4.8% on Wednesday after the leggings maker announced plans to double its annual revenue by 2026 to $12.5 billion. The stock rose about 1% in early trading Thursday. Under its five-year plan, the retailer expects its men’s business to double, its online sales to double and its international sales to quadruple from 2021 levels by 2026.

The company also announced the upcoming launch of a new membership model centered around fitness classes, which could be another potential revenue stream outside of its core apparel arm.

At least one analyst is worried about the potential backlash from Lululemon’s ambitious plan given the continued global supply chain disruption and inflationary pressures weighing on consumers. Following a recent rally in the retailer’s shares, others believe investors may come away from Wednesday’s presentation a bit disappointed.

Hiccups

Jefferies analyst Randal Konik said in a note to clients Thursday that Lululemon’s plan “will require an additional level of execution prowess,” as well as stability in the broader macro environment, which could be hard to reach.

Konik has a “hold” rating on Lululemon shares and a price target of $375. The stock last traded closer to $385.

Konik also said Lululemon’s recent push into the footwear category could turn out to be a bad idea, given all the competition already in the space, and could end up hurting profit margins. (Executives said Wednesday that the launch, starting with women’s running shoes, got off to a good start, but didn’t offer specific sales numbers.)

While Konik applauded the company’s new membership offers as a way to create more loyal customers, he reiterated his concerns about Mirror, the home fitness company that Lululemon acquired for $500 million in 2020. Lululemon replicates workout content on the Mirror platform. in its $39 per month membership plan.

“Our primary concern is slowing unit sales as consumers return to gyms,” Konik said of Mirror. “We believe Lululemon will have difficulty expanding the installed base in the future.”

‘Scattershot’

Bernstein analyst Aneesha Sherman said she remains cautious, particularly about Lululemon’s ability to increase gross margins, given the growing role international sales will play in the company’s broader strategy. .

In the past, Lululemon has expanded overseas in a “dispersed” and expensive way, resulting in unprofitable growth, she wrote in a note to clients.

Lululemon aims to grow its international business so that by 2026 it will reach the size of the North American business in 2020, executives said. And if sales of the men’s category were to double over the next five years, as the company predicted, they would be greater than those of the women’s division just two years ago.

Sherman has an “underperforming” rating on Lululemon, with a price target of $280.

“It’s not that we don’t like the business – with a high quality product, a very loyal customer base and a good management team, it has good fundamentals,” she said. “But the commodity growth trajectory is slowing and the business model lent itself to zero margin upside.”

Oven-baked

Kimberly Greenberger, an analyst at Morgan Stanley, says Lululemon’s financial goals may not be so ambitious, but that’s actually the problem.

In a note to clients on Thursday, she wrote that Lululemon’s financial goals appear to be achievable and in line with the high bar Wall Street has set for the activewear retailer in light of its success relative to other apparel companies. during the coronavirus pandemic.

However, given the rise in Lululemon shares ahead of Wednesday, she said investors may come away unsatisfied with the 2026 targets.

Lululemon’s stock is up about 25% from a month ago. When the retailer announced its fiscal fourth quarter results on March 29, it offered a better-than-expected outlook for the current year, which Greenberger said could prove conservative.

For 2022, Lululemon forecasts revenue of between $7.49 billion and $7.615 billion, with earnings per share of between $9.15 and $9.35.

“Most of the long-term goals seemed already built into the street numbers,” Greenberger said.

Greenberger has an “equal weight” rating on the stock, with a price target of $339.

At the heart of Lululemon’s plan will be product innovation, including investing in new gear for activities like golf and hiking, aside from the yoga wear it’s best known for.

Chief Executive Calvin McDonald said Wednesday he believes the company is still in the “early stages” of growth, citing the fact that Lululemon has already doubled sales from 2018 to 2021.

“The opportunity is really to keep doing what we’re doing. It works. It resonates,” McDonald said.

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