Lululemon is shooting for the moon, but Wall Street isn't convinced it can get there

Lululemon is setting lofty goals for growth in the next five years and laying out for analysts exactly how it plans to get there. But not everyone on Wall Street is sold.

Lululemon shares shed 4.8% on Wednesday after the leggings maker announced it’s aiming to double its annual revenue by 2026 to $12.5 billion. The stock was down more than 1% in afternoon trading Thursday. Within its five-year plan, the retailer expects its men’s business to double, its e-commerce sales to double, and its international revenue to quadruple from 2021 levels by 2026.

The company also announced the upcoming debut of a new membership model centered around fitness classes, which could serve as another potential revenue stream outside of its core apparel arm.

At least one analyst is concerned about potential hiccups in Lululemon’s ambitious blueprint given ongoing global supply chain disruption and inflationary pressures that are weighing on consumers. Following a recent ascent in the retailer’s shares, others believe investors could be coming away from Wednesday’s presentation a bit underwhelmed.

Jefferies analyst Randal Konik said in a note to clients Thursday that Lululemon’s plan “will require an added level of execution prowess,” as well as stability in the broader macroeconomic environment, that may be difficult to attain.

Konik has a hold rating on Lululemon shares and a price target of $375. The stock last traded closer to $380.

Konik also said that Lululemon’s recent push into the footwear category could prove to be a poor idea, given all the competition already in the space, and that it could end up weighing on profit margins. (Executives said Wednesday that the launch, starting with women’s running shoes, has been off to a strong start, but didn’t offer specific sales numbers.)

While Konik applauded the company’s new membership offerings as a way to create more loyal customers, he reiterated his concerns around Mirror, the at-home fitness business that Lululemon acquired for $500 million in 2020. Lululemon is folding the workout content on the Mirror platform into its $39-per-month membership plan.

“Our key concern is the slowing of unit sales as consumers return to gyms,” Konik said about Mirror. “We believe Lululemon will have difficulty expanding the installed base going forward.”

Bernstein analyst Aneesha Sherman said she remains cautious, particularly around Lululemon’s ability to elevate gross margins, given the increasing role that international sales will play in the company’s broader strategy.

In the past, Lululemon has expanded overseas in a “scattershot” and pricey way, resulting in unprofitable growth, she wrote in a note to clients.

Lululemon aims to grow its international business so that by 2026, it will be the size that the North America business was in 2020, executives said. And should the men’s category double sales in the next five years as the company’s predicted, it would be larger than its women’s division was just two years ago.

Sherman has an underperform rating on Lululemon, with a $280 price target.

“It’s not that we don’t like the company — with a high-quality product, a super-loyal following and a good management team, it has good fundamentals,” she said. “But the growth trajectory of core products is slowing and the business model was lending itself to zero margin upside.”

Kimberly Greenberger, an analyst at Morgan Stanley, says Lululemon’s financial goals may not be that ambitious — but that’s actually the problem.

In a note to clients Thursday, she wrote that Lululemon’s financial objectives appear to be achievable and in line with the high bar that Wall Street has set for the athletic apparel retailer in light of its success relative to other apparel businesses during the coronavirus pandemic.

However, given the run-up in Lululemon shares ahead of Wednesday, she said that investors could be coming away dissatisfied with the 2026 targets.

Lululemon’s stock is up about 25% from a month ago. When the retailer reported its fiscal fourth-quarter earnings results on March 29, it offered a better-than-expected outlook for the current year, which Greenberger said may turn out to be conservative.

For 2022, Lululemon expects revenue of between $7.49 billion and $7.615 billion, with earnings per share in a range of $9.15 to $9.35.

“Most of the long-term targets appeared already baked into Street numbers,” Greenberger said.

Greenberger has an equal weight rating on the shares, with a price target of $339.

Core to Lululemon’s plan will be product innovation, including investing in new gear for activities like golf and hiking, outside of the yoga apparel that it’s best known for.

Chief Executive Calvin McDonald said Wednesday he believes the company is still in the “early innings” of its growth, citing the fact that Lululemon already doubled its sales from 2018 to 2021.

“The opportunity is really to keep doing what we’re doing. It’s working. It’s resonating,” McDonald said.