Lululemon: Men are unreliable, overseas cannot support

LULULEMON: Men Can't Be Trusted, Overseas Can't Support

In the previous article "LULULEMON: It's Just a Pair of Black Pants, Why Should It Cut a Bloody Path?", we deeply analyzed that LULU's success is based on a unique community marketing business model built on extreme product strength. So, standing at the present, what is LULU's future growth space? Is it still a good investment target? In this article, Dolphin Research will continue to explore:

LULU announced its latest 5-year growth plan in April 2022, aiming to achieve a doubling of growth by 2026 compared to 2021 (with revenue reaching $12.5 billion). In terms of specific implementation paths, LULU plans to double its revenue in men's clothing, double its revenue in e-commerce, and quadruple its revenue in international markets. In addition, the management has provided a more detailed outlook on three dimensions: categories, channels, and markets. We will analyze LULU's future growth space according to the management's thinking:

1. Categories: Men's Clothing as the Core Incremental Market, but Can't Support the "Second Growth Curve"

Before focusing on the men's clothing business, let's first conduct a preliminary review of LULU's current situation and future development ideas by category for in-depth analysis later. According to the financial report, LULU is divided into three major businesses by category: men's clothing, women's clothing, and others:

Women's Clothing: The High Growth Phase Has Passed, Continuous Optimization & Innovation. LULU's women's clothing business has always been the core source of revenue since the brand's establishment, currently accounting for over 60% of revenue. From LULU's women's product line, a product matrix has formed centered on yoga pants, supplemented by sweatshirts, jackets, T-shirts, etc., covering basic styles for indoor sports and daily leisure scenarios based on different fabrics.

According to the company's management, the future product expansion direction for women's clothing will focus on exploring segmented scenarios (outdoor sports like tennis and golf, business formal wear, etc.) and innovations in fabric technology. However, of the new products launched by LULU in recent years, most are merely different colors, prints & decorations based on classic styles, and fabric innovations have mostly focused on improving breathability, elasticity, and extending fabric life, with no truly revolutionary innovative fabric products like Luon emerging. Therefore, Dolphin Research believes that from the perspective of product expansion, the growth space for women's clothing is limited.

Men's Clothing: Late Start, Second Growth Curve. LULU began its foray into men's clothing in 2013, replicating the successful formula of women's clothing, starting with fabrics and emphasizing comfort + fashion. Due to the low base of men's clothing, the growth rate has been higher than that of women's clothing in recent years, and by 2023, LULU's men's clothing business accounted for 23.4%. In the 5-year growth plan proposed by management in 2022, they aimed to double the men's clothing business by 2026, which we will analyze in detail later Others: Supplementary business with high profit margins; LULU's other businesses include footwear, sports accessories, and LULU Studio (a fitness experience platform). Although these are smaller in scale compared to men's and women's apparel, they have higher profit margins and growth rates. The footwear business is a new track opened by LULU in 2022, which management values, but it is currently small in scale and still in its infancy, so we will not discuss it for now. Currently, other businesses account for about 10% of overall revenue, positioning them as a supplement to the main business.

Men's Apparel: Incremental business, but hard to replicate the glory of "the little black pants"

From the perspective of category growth potential, the men's apparel business, having started later and with significant room for growth, is undoubtedly one of LULU's important strategic development directions. In 2024, LULU launched the most men's apparel new products in its history, covering various categories and sports fields, and signed multiple male brand ambassadors to enhance LULU's visibility and influence in the men's apparel sector.

However, from an annual perspective, five years ago (2019), the men's apparel business accounted for 23.5%, and now, five years later, its share has only increased by 0.7 percentage points. Dolphin Research believes this is sufficient to indicate that Lululemon's men's apparel business is not progressing smoothly.

Next, we will focus on discussing the growth potential of the men's apparel business. Overall, Dolphin Research is not optimistic about the men's apparel business exceeding expectations.

Source: LULU official website, HT

1) Unlike yoga pants, the competitive landscape for men's apparel is fragmented, with a wide range of choices on the same track. First, according to our previous analysis, yoga pants, which have a strong wrapping sensation, require high standards for fabric selection and cutting techniques. The tactile differences between yoga pants made from different fabrics and cutting designs are significant, which allowed LULU's "little black pants" to have no competitors in the market at the time of their launch due to their exceptional fabric and cutting techniques. Coupled with the rise of yoga in North America, the penetration rate of "the little black pants" has steadily increased, establishing LULU's brand strength. However, this also means that, in a certain sense, LULU is bound to the yoga pants category.

From a competitive landscape perspective, the high-end yoga pants market is relatively concentrated. According to Euromonitor data, although many "LULU yoga pants alternatives" brands, including Alo Yoga and Maia, have emerged after "the little black pants," LULU still holds nearly 40% market share in the high-end yoga pants sector, exceeding the second-place Alo Yoga by nearly 20 percentage points, maintaining a dominant position. The underlying reason is that LULU's yoga pants possess extremely high product strength and are less substitutable.

This is not the case for men's clothing. Whether it's business casual or sports casual, the range of options is much broader.

Taking LULU's best-selling business casual men's pants, the ABC (Anti-Ball Crushing) series, as an example, the name itself suggests that the ABC series focuses on being loose and comfortable, not harming male private parts, and is more comfortable to wear than formal pants, yet not as casual as sweatpants.

However, the problem is that business casual pants are not synonymous with LULU. Long before LULU, international brands like Banana Republic and J Crew, as well as domestic brands like Jiumuwang and Woodpecker, had a deep technical accumulation and brand recognition in business casual men's pants. As a later entrant, although LULU's fabric performance is superior to the aforementioned brands, it pales in comparison to the brand recognition brought by women's "little black pants." Moreover, the fabric and cut of men's pants do not have the same "strict" requirements for the final product's feel as yoga pants, making them more easily substitutable for consumers.

2) Serious Lack of Cost-Effectiveness

There is a saying in the consumer field: "The order of consumption ability from high to low is women, children, the elderly, dogs, and men." Although it's a joke, it also reflects that for the same category, it is not easy to stimulate male consumption. Compared to the diverse and high-frequency consumption needs of women, men's consumption willingness is often more singular and plain.

According to the chart below, Dolphin Research has collected similar items from other brands that compete with the ABC series long pants on the market. A single pair of long pants from LULU is priced at 1,030 yuan, which is double that of Jiumuwang and twice that of Uniqlo and MUJI. If we consider that a few years ago, male consumers were willing to pay a premium for LULU's higher-tech fabrics and looser comfort, this logic might still hold, but it seems less convincing in the current context of "middle-class" consumption power being impaired.

On the other hand, according to official data from Lululemon, 60% of LULU's men's clothing sales come from recommendations by their partners who have been influenced to buy LULU, while spontaneous purchases of LULU men's clothing are rare.

Overall, as the first sports brand to break through the female market, entering the men's clothing segment is naturally an essential step for continued growth. However, based on the analysis above, Dolphin Research believes that LULU's men's clothing lacks a highly recognizable and representative flagship product (comparable to the women's "little black pants"), resulting in the men's clothing business being less distinguishable compared to many competitors, with much of the brand recognition still stemming from women's clothing. **

Therefore, Dolphin Research believes that unless men's clothing can create a blockbuster item similar to the "little black pants" that lead the trend, it will be difficult for the men's clothing business to replicate the glory of the "little black pants."

Essentially, men's clothing has only achieved its current state as a spillover from women's business. For LULU, it is indeed an incremental market that can expand its sales scale, but for men's clothing to be similar to women's business and become the second growth curve supporting LULU, there is still some difficulty.

II. International Market: The True Flagbearer of Future Growth?

In the previous section, we explored the growth potential of LULU's various businesses from a category perspective and concluded that it is challenging for LULU's men's clothing to replicate the glory of women's "little black pants."

Now, in Dolphin Research's view, the real possibility of supporting LULU's growth premium lies in expanding the market (overseas markets), which is far more hopeful than expanding categories (men's clothing).

First, let's look at the current market expansion status of the company:

North America: The high growth period has passed, entering a low growth phase. North America (the United States & Canada), as LULU's home base, currently accounts for 75% of revenue. After more than 20 years of development, LULU's yoga pants have a penetration rate of nearly 40% among women aged 25-45 (core potential users), having completed the penetration of core users.

In terms of scale, LULU's total revenue in North America is projected to be USD 7.93 billion in 2024, a year-on-year increase of 4%, with apparel revenue at USD 6.9 billion, which has surpassed NIKE's apparel revenue in North America (NIKE at USD 6.1 billion). Therefore, Dolphin Research believes that LULU's high growth period in North America has passed, and it will enter a low growth phase in the future.

Looking at past performance in North America, LULU's growth rate dropped from 30% in 2023 to 12%, with a further decline to 4% in 2024. Combined with recent discussions from management during conference calls and research minutes, it can be summarized as follows:

Deteriorating Competitive Landscape: Currently, the "counterfeit culture" is prevalent in North America, with young consumers keen on purchasing affordable knockoffs, leading to a decline in loyalty to major brands as they focus on personal style. In this context, competitors like Alo Yoga, Vuori, and the Free People Movement have begun to erode LULU's market share in North America.

2) Slowing Product Innovation Speed: As LULU has completed the penetration of core users in North America, the introduction of new products is crucial for growth. According to statistics, since 2023, LULU's new product rate (number of new products/total number of products) has started to decline significantly, with the cycle from product development to market launch slowing down, resulting in a lack of timeliness for new products.

In response to the above two points, Dolphin Research believes that the changes in consumption behavior among the young consumer group in North America, which have led to a deterioration in LULU's competitive landscape, cannot be avoided in the short term. The slowdown in product innovation speed is speculated to be related to the departure of LULU's former Chief Product Officer Sun Choe and the need for the new team to undergo a certain period of adjustment. According to information from the company's conference call in Q4 2024, LULU's overall product innovation speed has returned to normal levels Therefore, Dolphin Research believes that the core reason for the slowdown in growth in North America is that the core consumer group for yoga pants in North America has completed its penetration. The company currently has not developed a second category that can truly take over from yoga pants.

Source: Goldman Sachs, Dolphin Research

International Market: Rapidly increasing penetration rate, still in a high growth period.

As seen in the chart below, the growth rate of LULU's international market over the past five years has far exceeded that of North America, with the Chinese market being the fastest-growing market internationally, both in terms of the number of stores and single-store efficiency.

According to data disclosed by LULU, the CAGR in China has reached over 50% in the past three years amid a weak consumption environment. Meanwhile, more than half of the stores in China have opened in the past three years, the highest proportion among major global markets, indicating the management's emphasis on the Chinese market.

From the perspective of store openings, LULU's strategy is very clear: it focuses on building brand recognition in high-tier cities and then gradually expands into lower-tier cities. Currently, LULU has covered the super-first-tier and first-tier cities in China and is gradually expanding into second and third-tier cities.

However, it is important to note that due to LULU's relatively high price point, the purchasing power in lower-tier cities is naturally not comparable to that in higher-tier cities. Therefore, if the store opening speed remains unchanged, the slowdown in single-store revenue may lead to a decrease in LULU's revenue growth in China.

Compared to more mature sportswear companies like Nike, Adidas, and Under Armour, LULU's current international market share is still relatively low, at only 27%, while mature sportswear companies generally have an international business share of over 40%.

In terms of growth rate, according to the management's five-year growth plan, with 2021 as the base year, a fourfold increase in the international market corresponds to an international market revenue CAGR of 32%, while LULU's overseas revenue CAGR is expected to reach 41% from 2011 to 2024 This is still based on the situation where the company has not made significant efforts in the European market. In the medium to long term, if we do not consider the company's expansion into other popular product categories and purely rely on yoga pants to develop the European market, Dolphin Research believes that reaching the scale of the China region should not be a big problem.

3. How to view the current investment value of LULU?

1. How much growth potential does LULU have in the future?

First, in terms of profit forecasts, we estimate based on three regions: North America, China, and international markets excluding China.

Revenue side:

North America: Based on the analysis above, in the context of a deteriorating competitive landscape, the penetration rate of yoga pants nearing its limit, and a slowdown in product innovation speed, we assume that LULU's growth rate in North America will decline to low single digits over the next five years, with a CAGR of approximately 2%.

China: In terms of the number of stores, by the end of 2024, LULU will have a total of 156 stores in China. Compared to Anta and Li Ning, which have over 1,000 direct-operated stores in China, LULU is still in the initial stage. The company plans to open 220 stores by 2026, with a store CAGR of nearly 20%. We assume that LULU's store opening speed will gradually slow down as it expands into lower-tier cities, reaching 251 stores by 2029.

In terms of revenue per store, although LULU is still in the penetration stage of brand recognition in China, with the strong rise of domestic "alternative" brands such as Glowmode (a sportswear brand under Shein), MAIA ACTIVE, and Particle Frenzy, combined with the lower consumption power in lower-tier markets compared to higher-tier markets, we assume that LULU's revenue per store will gradually slow down, with a CAGR of 2.2% from 2025 to 2029. Based on the above assumptions, we estimate that LULU's revenue CAGR in China over the next five years will be around 14%.

International markets excluding China: From the distribution of stores, LULU's overseas stores are mainly concentrated in developed regions such as Australia, the UK, South Korea, Hong Kong, and Japan. The total number of overseas stores, excluding China, is close to that in China (around 150). Looking at the growth rate over the past three years, the growth rate of international markets excluding China has remained stable, maintaining a high growth phase of 30%. Considering that competition in international markets outside of China is not as intense as in China and that consumption power is relatively high, we assume that the growth rate of international markets excluding China will slightly slow down with the expansion of scale, with a CAGR of 20% from 2025 to 2029.

Based on the above assumptions, we estimate that the revenue growth CAGR from 2025 to 2029 will be 6.3%. For specific data, see the chart below.

Profit Side: In terms of gross margin, with the launch of new products by LULU and the gradual strengthening of scale effects, we assume that LULU's gross margin will slightly improve, increasing from 58% to around 60% over the next five years. Regarding expense ratio, with the advancement of digitalization (decrease in marketing costs) and optimization of internal operational efficiency, we assume that LULU still has further room for reduction in marketing and management expenses, leading to a slight decrease in expense ratio. Based on the above assumptions, we conclude that LULU's profit CAGR over the next five years will be around 8.5%. The specific data can be seen in the chart below.

2. How to view LULU's valuation?

First, from LULU's valuation level, the current valuation is only 18x, the lowest level in the past 10 years. The core reason lies in the stagnation of growth in the company's core category—yoga pants in the domestic market. Although the overseas market has a high growth rate, the high proportion of the domestic market still cannot support LULU's overall performance growth. Additionally, other categories (menswear, shoes) cannot carry on the high growth myth brought by yoga pants, thus the growth potential for Lululemon must be discounted, leading to a downward adjustment in valuation.

Referring to the period from 2015 to 2017, LULU faced significant inventory pressure due to product quality issues (the fabric of yoga pants was too thin, easily causing wardrobe malfunctions for women), coupled with turmoil in the core management team, causing the company's revenue growth rate to drop sharply from over 35% to 10%-15%. In 2016, profits even fell into negative growth for a time. During that period, LULU's valuation was adjusted down from a peak of 40x to a low of around 22x, indicating that despite the damage to growth potential, the market still granted the company a certain valuation premium considering Lululemon's position as the leader in yoga pants.

Therefore, combining Dolphin Research's performance forecast above, under the assumption of a 9% CAGR in net profit growth for LULU over the next three years, considering the valuation premium for the company as the leader in yoga pants, Dolphin Research believes that the current valuation of 18x still has room to go down in the short term and does not have sufficient margin of safety. Without considering further deterioration in the competitive landscape, for investors optimistic about medium to long-term overseas growth, Dolphin Research believes it is advisable to wait until the valuation is below 15x before considering entry.

From a relative valuation perspective, we compare LULU with Anta, Adidas, and Amer Sports, all of which are in the sportswear industry. From the perspective of PEG, it can be seen that LULU's PEG is 1.4, still higher than that of comparable companies. Dolphin Research speculates that the market still gives a certain premium to LULU's potential in overseas markets (especially in China), therefore, if the penetration rate of the core category—yoga pants—reaches a bottleneck in overseas markets in the future, and at that time LULU still has not truly built a "second growth curve," LULU's valuation is likely to be further adjusted downwards.

Finally, from an absolute valuation perspective, we estimate the WACC at 11%, and under the assumption of a future perpetual growth rate of 2.5%, we calculate LULU's stock price to be $278.2, which leaves no room compared to the current stock price, thus making it less meaningful to enter at this stage. However, due to LULU's strong performance in yoga pants, Dolphin Research is still relatively optimistic about LULU's expansion space in the European market in the medium to long term. In an optimistic scenario, if Europe can "create another Chinese market," Dolphin Research estimates about a 20% upside compared to the current stock price.

Summary:

Based on the analysis of LULU in the previous two articles, Dolphin Research feels that LULU, as a sports apparel company that started and deeply cultivated the niche market of yoga pants, continuously cultivates its core audience and enhances customer stickiness, achieving a high penetration rate to become the largest in yoga pants and the second largest sports apparel company globally is quite remarkable. After all, the scale of yoga pants is not on the same level as the main businesses of Nike, Adidas, and Anta—sports shoes.

However, if LULU wants to grow further, category expansion is an unavoidable option. However, Dolphin Research believes that the difficulty of category expansion is inherently higher than expanding channels and audiences within the existing category.

Taking Under Armour, which also focuses on a niche market—compression clothing—as an example, Under Armour's core category focuses on functional compression clothing for high-intensity male sports, with excellent moisture-wicking properties. With its unique fabric technology (microfiber material), Under Armour initially attracted many core audience groups (basketball, rugby, etc. high-intensity sports), capturing over 70% of the U.S. compression clothing market at its peak.

However, as the penetration rate of compression clothing reached a bottleneck, Under Armour began to expand into categories such as sneakers and women's clothing in search of growth. However, due to the weaker functionality of Under Armour in these new categories, it could not compete with traditional strong giants like Adidas and Nike. Coupled with aggressive category expansion, the high-growth myth ultimately collapsed.

From the review of Under Armour, it can be seen that LULU's current development stage is quite similar to Under Armour's category expansion period, but LULU's smart points are: 1. The category expansion is not as aggressive as Under Armour's; 2. The expansion direction is relatively niche (golf, tennis apparel, etc.), avoiding the red ocean categories that traditional apparel giants have been deeply cultivating for years. However, overall, Shanghai Dolphin Research believes that unless LULU truly cultivates the next blockbuster category similar to "yoga pants," it will be difficult for LULU to return to the previous high-growth stage in the future.

Past research:

In-depth analysis:

LULULEMON: It's just a pair of black pants, why can it carve out a path? -

Financial report commentary:

April 1, 2025, financial report commentary Lululemon: "Little Black Pants" are not working, is the Hermes of Yoga being double-killed?

April 1, 2025 conference call: Lululemon (Minutes): Expected growth of 5%-7% for the full year 2025