Lululemon stock undervalued: Swartz

Key Concepts

• Lululemon Athletica: A company known for athletic apparel.
• National Football League (NFL): A professional American football league.
• Fanatics Inc.: A company specializing in licensed sports merchandise.
• Athleisure: Casual clothing designed for athletic activities and everyday wear.
• Sportswear: Clothing designed for sports and physical exercise.
• Direct-to-Consumer (DTC): Selling products directly to customers without intermediaries.
• Wholesale Partnerships: Selling products to other retailers for resale.
• Dupe: A lower-cost alternative or copy of a product.
• Equity Analyst: A financial professional who analyzes stocks and provides investment recommendations.
• Morning Star Research Services: A financial services firm providing investment research.

Lululemon's Partnership with NFL and Fanatics

Lululemon Athletica has announced a new partnership with the National Football League (NFL) and Fanatics Inc. to launch a clothing line for all 32 NFL teams. This marks the first time Lululemon will offer officially licensed NFL products. The collection is launching today.

Strategic Shift Towards Sportswear

David Schwarz, a senior equity analyst at Morning Star Research Services, views this move as a continuation of Lululemon's strategy to become more involved in the broader sportswear space. Historically, Lululemon was primarily recognized as a women's athleisure company. However, in recent years, the company has expanded its product offerings, including footwear, and engaged in more traditional sports marketing through athlete sponsorships and partnerships, such as the one with the NFL and Fanatics, which was announced last year. Lululemon also has a similar deal for NHL gear. This diversification aims to attract a wider range of demographic groups and specifically expand its men's business.

Performance of NHL Partnership

While Lululemon has been involved with the NHL for a year, specific financial results from that partnership have not been publicly disclosed. Schwarz suggests that for a company of Lululemon's size (an $11 billion sales company), this partnership is likely more of a marketing opportunity than a significant driver of sales or profits. The primary goal is to expand market reach and advertising to consumers who may not traditionally perceive Lululemon as a brand for them.

Expanding the Men's Business and Brand Perception

Lululemon's men's business has grown significantly over the years, though it may not be widely recognized. The NFL and NHL deals are seen as strategic moves to further build this segment and change the perception of Lululemon from solely an athleisure brand to a more comprehensive sports brand, comparable to Nike and Adidas. While immediate widespread adoption of Lululemon NFL gear is not anticipated, it represents a starting point for future opportunities.

Future Opportunities in Footwear

A significant future opportunity for Lululemon lies in the footwear market. Currently, Lululemon has a very small presence in shoes, despite footwear being a major driver in the broader sportswear market. To succeed in this highly competitive category, Lululemon may need to consider partnerships or even acquisitions. Schwarz notes that even established players like Nike have faced challenges in the footwear sector recently.

Exploring Wholesale Partnerships

Lululemon predominantly operates on a direct-to-consumer (DTC) model, which benefits its profit margins. However, this approach limits its reach to consumers who shop at multi-brand retailers like Dick's Sporting Goods or Foot Locker but do not visit Lululemon stores. Schwarz suggests that Lululemon should consider more wholesale partnerships to access these untapped customer segments.

International Growth Strategy

International expansion is identified as Lululemon's primary growth engine. The company is actively opening stores in China and Western Europe. In Europe, Lululemon has a limited store presence even in major countries, presenting a significant opportunity for growth, although brand awareness is lower than in the US and Canada. In China, which is the second-largest sportswear market globally, Lululemon has far fewer stores than competitors like Adidas and Nike, indicating potential for years of expansion.

Valuation and Future Outlook

Schwarz believes that the market is underestimating Lululemon's future opportunities, particularly in international markets. His fair value estimate for Lululemon's stock is $295 per share, which is significantly higher than its current trading price.

The Challenge of "Dupes"

The discussion also touched upon "dupes," which are lower-cost alternatives or copies of Lululemon products. While Lululemon has faced imitation for years, Schwarz acknowledges it as a persistent challenge due to intense competition. However, he maintains that Lululemon's strong brand loyalty, high-quality fabrics, and premium product positioning differentiate it from lower-priced alternatives.

Conclusion

Lululemon's partnership with the NFL and Fanatics signifies a strategic push to broaden its market presence and solidify its position as a comprehensive sportswear brand. While the immediate sales impact may be limited, these initiatives, alongside international expansion and potential ventures into footwear and wholesale, are expected to drive future growth and enhance brand perception. The company's focus on international markets and its premium product offering are key factors supporting a positive long-term outlook, despite challenges like product imitation.