Lululemon Athletica (Nasdaq: LULU): A Bear Market Theory

Lululemon Athletica (NASDAQ: LULU) is a leading athletic apparel and footwear brand that saw its revenue grow 19% to $10 billion in 2023, driven by indoor workouts for women and the yoga segment. Over 70% of the company's revenue comes from women's apparel, primarily from the U.S. and China markets. The company entered the footwear space with a women's running shoe line in 2022 and launched men's running shoes in 2024. However, the footwear segment contributes less than 5% of the company's revenue. Several shareholders such as Vanguard and Blackrock own LULU in a slow-money-dominated ownership structure, which could be one reason why the stock price is lagging behind earnings. Here we summarized a bearish thesis by TrojansFightOn on Value Investors Club published in April.

A store clerk in a sportswear store replenishes her inventory.

The bear case identified LULU as a high-certainty short candidate in the near term, citing forecasts of a U.S. sales slump and data suggesting negative U.S. growth in the first quarter. However, LULU's China business is growing quickly, with sources suggesting mainland sales growth of between 30% and 40%, in line with consensus estimates. At the same time, low penetration in Latin America, Europe and Asia (excluding China), coupled with the company's commitment to expanding its product lines in golf, tennis and recreational sports, could provide additional growth opportunities.

LULU's strategy of expanding its product line is a typical approach companies take when sales of its main product line are declining. The thesis cites Under Armour, the leader in indoor fitness, when sales were declining in 2017 and focused on yoga, skiing and golf. The move did not go as expected. While it remains unclear whether the brand has already peaked, management remains committed to fueling growth in the foreseeable future with the support of new product lines.

LULU is not on our list of the 31 most popular stocks among hedge funds. According to our database, 45 hedge fund portfolios held LULU at the end of the second quarter, compared to 51 in the previous quarter. While we recognize LULU's potential as an investment, we believe AI stocks promise higher returns and do so in a shorter time frame. If you are looking for an AI stock that is as promising as LULU but trades at less than 5 times its earnings, read our report on the cheapest AI stock.

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