The fashion industry is typically not at the core of most investors' portfolio, but Lulu Lemon delivered strong Q4 earnings and their stock has been skyrocketing these last few years. If you hold LULU, I suggest that you sell, and I will do my best to outline the reasons for this below.
Full disclosure, I work in the fashion industry for a big market player which is technically a competitor to LULU, but I do not hold any positions in either company or the apparel industry, nor have I anything to gain by writing this. The below is not based on insider knowledge and simply by my observations from publicly available information.
The stock price of LULU has increased rapidly over the last few years, in part due to strong growth, and in part due to hype.
Here are some examples from the competition:
Nike: The world's biggest performance and sportswear company with a market cap of $190B reached $37,4B in revenue in 2022. They are strong in multiple product categories and excel in footwear, a product that appeals to all genders and will never go out of style. The financials reflect this with steady Y/Y growth.
PVH Corp: A jack of all trades, its strongest product group is Calvin Klein Underwear. Again, a product category that never goes out of style and appeals to everyone. It reached $9bn in revenue in 2022 and has a market cap of $5,5bn. Similarly with a steady Y/Y growth.
Lulu: originally a women's performance and yoga brand now trying to sell multiple product categories to new markets and new consumer groups. Their strength is in D2C, but their growth has been rapid and trend-driven. In 2022 they hit $8bn in revenue and has a market cap of $46bn
Their goal is to double their 2021 revenue by 2026, and investors seem confident that they can accomplish this. I believe they will never reach this goal. In fact, I believe their revenue is doomed to decrease. Here are the reasons why I believe this:
- Lululemon's biggest product group is leggings. Leggings are trendy and mostly appeal to women. Contrast this with the aforementioned product categories, leggings are not here to stay, and the Lululemon brand is not ready for a change in consumer behavior.
- LULU is funding their growth largely with debt and has reached a debt to equity ratio of 0.78. This is above average for the industry and contributes to the aforementioned risks.
My experience as a trader is less than my experience as an employee in the fashion industry, so there may be more reasons why LULU is a risky investment, and you may disagree with what I've put forth here. I'm considering a short position in LULU and I'd love to hear your thoughts on this.
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