Lululemon: "The Little Black Pants" are no longer attractive, has the Hermes of the yoga world been double-killed?

$Lululemon(LULU.US) Lululemon: "The Little Black Pants" are not working anymore, has the Hermes of yoga been double-killed?

Lululemon released its Q4 2024 financial report (ending December 2024) after the U.S. stock market closed on March 28, 2025, Beijing time. The overall performance in Q4 exceeded expectations, but due to the guidance for Q1 and the full year of 2025 being lower than expected, the company's stock price plummeted by more than 14%. The key information is as follows:

1. Q4 2024 performance exceeded market expectations. In Q4 2024, Lululemon achieved revenue of $3.61 billion, a year-on-year increase of 12.7%, exceeding market expectations by 0.6% (the market consensus expectation was $3.59 billion). Additionally, due to an increase in gross margin and stable expense ratios, the company's core operating profit reached $1.04 billion, exceeding market expectations by 5.2%.

2. Continued high growth in China, with North America showing sequential recovery. By region, in Q4, the revenue contribution from China, which accounted for around 15%, grew by 40%, reaching a new high for the year. It is evident that the company is still in a phase of rapid brand penetration in China. North America, as the company's home market, saw a 7.4% year-on-year growth in Q4, improving sequentially compared to previous quarters, as the company increased the launch of new products during the traditional shopping peak season (Christmas + Black Friday).

3. Men's apparel growth remains slow. By category, men's apparel, as the second growth curve, grew by 17.2% year-on-year, leading all categories, but with a contribution of just over 25%, this leadership is too small. This is despite the company increasing the introduction of patented fabrics for male sports scenarios and strengthening celebrity endorsements (signing F1 legend Lewis Hamilton and American golfer Max Homa as brand ambassadors, and the first F1 driver in the Chinese market, Zhou Guanyu).

4. Store opening speed reached a new quarterly high. As of Q4 2024, the company had a total of 767 stores worldwide, with a net increase of 18 stores, setting a new quarterly record for openings. Additionally, the company upgraded some existing stores, optimizing customer experience and enhancing store efficiency by creating urban flagship stores. From the perspective of growth across channels, offline direct-operated stores grew by 18% year-on-year, far exceeding the 8% growth online.

5. Improved product structure, stable expenses, and operating profit exceeded expectations. According to channel research information, on one hand, the speed of new product launches for Lululemon in Q4 gradually returned to normal levels, continuously expanding high-margin products including golf and tennis sports scenarios. Coupled with a decrease in production costs, the gross margin in Q4 reached 60.4%, a historical high. The expense side remained stable, with core operating profit reaching $1.04 billion, exceeding market expectations by 5.2%

6. The 2025 guidance is below expectations. The company's Q1 2025 revenue guidance is USD 2.34-2.36 billion, a year-on-year increase of 6%-7%. The full-year guidance for 2025 is USD 11.15-11.3 billion, a year-on-year increase of 5%-7%. However, both the upper limits of the Q1 and full-year performance guidance are below Bloomberg's consensus expectations (Q1 and full-year consensus expectations are USD 2.39 billion and USD 11.31 billion, respectively). The management's core concern is that the uncertainty of the U.S. macro economy will lead consumers to reduce offline spending.

7. Overview of core financial information

Dolphin Research's overall view:

From the perspective of various financial indicators in Q4, Lululemon's performance is barely acceptable, but the stock price plummeted 14% that day. The core reason lies in the management's overly tepid performance guidance for 2025.

The management attributes the slowdown in North American growth to the uncertainty of the macro economy, which will lead consumers to reduce the frequency of offline shopping. However, if the decline in the macro economy only affects consumers' willingness to purchase, Lululemon's issues are not significant, and performance will clearly recover in an economic upturn.

In Dolphin Research's view, with revenue just exceeding USD 10 billion over the year, the guidance has only single-digit growth left, which truly indicates that:

a. The growth factor in North America is that Lululemon's core category—yoga pants—has basically completed penetration among the core consumer group in North America;

b. The second growth curve in men's clothing has not been genuinely developed, failing to support the second curve, resulting in a direct gap for the company.

In comparison, the consumption environment in China has been poor in recent years, and many similar brands like Maia Active, which are "Lululemon alternatives," have emerged, yet Lululemon still maintains high growth; Pop Mart has also achieved over 100% growth through category expansion and market expansion.

Therefore, for a growth-valued Lululemon, with revenue not reaching a sufficiently large scale, the drop in growth rate to single digits can only indicate that the existing market has matured, and the second curve has not been developed.

Dolphin Research analyzed in the article LULULEMON: Just a pair of black pants, why can it carve out a bloody path? that Lululemon's past success was built on identifying the "pain points" of women practicing yoga, driven by extreme fabric technology and differentiated community marketing that continuously strengthens consumer brand loyalty Therefore, as the core yoga pants category of the company gradually reaches its growth peak and other categories (menswear, footwear) cannot take over the high growth myth brought by yoga pants, the growth potential for Lululemon must be discounted, which has led to a downward adjustment in valuation. This is the real concern for Dolphin Research.

From a valuation perspective, despite a 14%+ plunge on the day of the earnings report, the current valuation corresponds to 18x for 2025, which is still relatively high compared to Dolphin Research's forecast of single-digit growth over the next three years. Therefore, until the company truly finds a second high-growth business, Dolphin Research still recommends a wait-and-see attitude.

Dolphin Research will soon conduct a detailed assessment of Lululemon's asset value, so please stay tuned!

Below is a detailed analysis of the fourth-quarter earnings report:

I. Investment Logic Framework

According to the company's disclosure, Lululemon's revenue mainly comes from three businesses: womenswear, menswear, and others. We will briefly introduce these three businesses for further in-depth analysis later.

Womenswear: The company's performance pillar. Lululemon's womenswear business has been the core source of revenue since the brand's inception, currently accounting for over 60% of revenue. From the product line of Lululemon's womenswear, a product matrix has been formed with yoga pants as the core, supplemented by sweatshirts, jackets, T-shirts, etc., covering basic styles for indoor sports and daily leisure scenarios based on different fabrics.

**Menswear:Started late, responsible for the second growth curve. Lululemon began its menswear business in 2013, replicating the successful formula of womenswear, focusing on comfort and fashion through fabric. Due to the low base of menswear, its growth rate has exceeded that of womenswear in recent years. Management proposed in the 2022 five-year growth plan to double the menswear business by 2026.

**Others:High-margin supplementary business. Lululemon's other businesses include footwear, sports accessories, and Lululemon studios (fitness experience platforms). Although smaller in scale compared to menswear and womenswear, they have higher profit margins and growth rates.

Among them, the footwear business is a new track opened by Lululemon in 2022, which management values highly, but it is currently small in scale and still in the early stages.

II. Overall Performance: 4Q24 results slightly exceed market expectations

In 4Q24, Lululemon achieved total revenue of $3.61 billion, a year-on-year increase of 12.7%, slightly exceeding market expectations by 0.6% (the market consensus expectation was $3.59 billion). On one hand, the company increased its store openings in Q4, and on the other hand, the speed of new product launches gradually returned to normal levels, resulting in an overall growth rate that improved compared to the previous three quarters.

2. The proportion of men's clothing business in the "second growth curve" is increasing slowly

From a category perspective, the men's clothing segment, as the second curve, grew by 17.2% year-on-year. Although this growth rate leads all categories, the current proportion of men's clothing business is only 25%, which is not impressive compared to the approximately 10% growth rate of women's clothing.

This is still under the circumstance that the company has increased the promotion of patented fabrics for male sports scenarios (in 2024, it launched the most men's clothing new products in history) and strengthened celebrity endorsements (signed F1 legend driver Lewis Hamilton and American golfer Max Homa as brand ambassadors, and the first F1 driver in the Chinese market, Zhou Guanyu).

From an annual perspective, five years ago (in 2019), the proportion of men's clothing business reached 23.5%, and now, five years later, the proportion has only increased by 0.7 percentage points. Dolphin Research believes this is enough to indicate that Lululemon's men's clothing business is not progressing smoothly.

On one hand, Dolphin Research believes that for men's clothing, whether in business casual or sports casual tracks, the range of choices should be broader and more extensive. International brands like Banana Republic and J Crew, as well as domestic brands like Jiumuwang and Woodpecker, have deep technical accumulation and brand recognition in business casual men's pants.

As a latecomer, Lululemon, despite having superior fabric performance compared to the aforementioned brands, lacks a highly recognizable flagship product. Compared to the brand recognition brought by women's "little black pants," it can be said to be overshadowed. Moreover, the fabric and tailoring 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.

Combining with the official survey previously conducted by Lululemon, 60% of the company's men's clothing sales come from recommendations by their life partners after being influenced by Lululemon, meaning that the number of consumers who spontaneously purchase men's clothing is small, and more are driven by the brand recognition spillover after women's clothing became popular.

In addition, the company's newly developed footwear business (included in other categories) is still relatively small in scale. Although some new products (casual shoes Cityverse, running shoes Beyondfeel) have received positive consumer feedback, they do not contribute significantly to overall performance.

3. Strong performance in the Chinese market

From a regional perspective, in Q4 2024, the China region grew by 40%, achieving a new high for the year. Dolphin Research believes that the core reason behind this high growth is that the company is still in a rapid phase of increasing brand recognition and core audience coverage in China. From the perspective of the number of stores opened, the company opened 56 stores globally throughout 2024, of which 24 were in China, accounting for over 40%. It has begun to gradually penetrate from first-tier cities to second and third-tier cities, enhancing the brand's market coverage and reach.

As North America serves as the company's home market, the company increased the launch of new products during the traditional shopping peak season at the end of the year, achieving a year-on-year growth of 7.4% in Q4, with a sequential improvement in growth rate.

IV. Store Opening as the Core Driver

As of Q4 2024, the total number of stores globally reached 767, with a net increase of 18 stores quarter-on-quarter, setting a new record for quarterly store openings. Most of these stores are located in China. Additionally, the company has upgraded some existing stores by creating flagship stores in cities to optimize customer experience and enhance store efficiency. From the perspective of growth across various channels, offline direct-operated stores grew by 18% year-on-year, far exceeding the 8% growth online.

In terms of same-store revenue growth, the company's same-store revenue growth in Q4 2024 was 4%, which is only a 1 percentage point increase compared to the previous two quarters. Compared to over 30% same-store revenue growth three years ago (in 2021), the current drop to low single digits further confirms the saturation of the core North American market (the backlash on single-store revenue) + the impact of category transitions on Lululemon's growth.

Therefore, overall, before the "second growth curve" in categories is truly realized, the most direct source of performance growth for Lululemon can only come from expanding stores in international markets.

Information from the conference call also supports this, as the company has made aggressive plans for store expansion in overseas markets for 2025, with a net addition of 40-45 stores throughout the year, most of which will come from within China. Additionally, it plans to enter European countries such as Italy and Spain.

Although the expansion into international markets is indeed considered a growth market for Lululemon in the short term, Dolphin Research believes that the core of long-term growth still needs to break through in categories.

5. Gross Margin Continues to Improve

According to channel research information, on one hand, Lululemon's new product launch speed gradually returned to normal levels in Q4, continuously expanding high gross margin products including golf, tennis, and other sports scenarios. Coupled with a decrease in production costs, the gross margin in Q4 reached 60.4%, setting a new historical high.

6. Expense Investment Remains Stable

In terms of expense investment, since Q4 is the traditional peak consumption season overseas, the company's expense investment remained stable compared to the same period in the previous year, ultimately achieving a core operating profit of $1.04 billion, exceeding market expectations by 5.2%.

Dolphin Research "Lululemon" Historical Articles:

In-depth:

LULULEMON: Just a Pair of Black Pants, Why Can It Break Through? -