Lululemon's (NASDAQ: LULU) management team recently revealed its five-year financial plan, and said the business expects to double its 2021 annual revenue by 2026, taking its top line to $12.5 billion. But since that announcement was made on April 20, the stock has declined by 29%.
Based on its monster success in recent years, with sales and profit ballooning, it might be easy to assume that the athletic-wear retailer should have no problem reaching that target. But Lululemon's key growth levers -- its men's segment, the digital channel, and international expansion -- will put it squarely against global sports apparel juggernaut Nike (NYSE: NKE).
Here's why this battle could prevent Lululemon from hitting $12.5 billion in revenue by 2026.
Competing head-to-head with Nike
Lululemon's "Power of Three" strategy, unveiled in 2019, aimed to "double men's, double digital, and quadruple international" revenues by 2023. The business hit these targets ahead of schedule, leading management to the optimistic view that it could once again double men's and digital sales, as well as quadruple its international revenue.
For what it's worth, sales growth in Lululemon's men's business has outpaced women's over the past couple of years, and its international growth has far exceeded the gains registered in North America. What's more, digital revenue accounted for 49% of the overall business in the fourth quarter of its fiscal 2021 (which ended Jan. 30).
But while Lululemon burst onto the scene by attracting an extremely loyal fanbase among women with its yoga pants and related apparel, its new focus areas are niches where Nike absolutely shines.
Ever since its founding in 1964, Nike has primarily catered to the men's category. And this still holds true today as 53% of the Nike brand's wholesale revenue was derived from men's sales. For comparison's sake, 67% of Lululemon's revenue in fiscal 2021 came from guests who shop its women's range. Products like the ABC Joggers and City Sweat Crew, as well as sports-specific apparel for golf and tennis, should help Lululemon. But when it comes to men's sports apparel, Nike likely still has the edge.
Lululemon does generate a greater share of its revenue from digital channels than Nike does -- 49% in Q4 fiscal 2021 compared to 26% for Nike. But the latter has a more robust digital ecosystem, consisting of four popular mobile apps that drive engagement and build community (Nike mobile app, SNKRS, Nike Training Club, Nike Running Club). Those apps and ecosystems have hundreds of millions of members in total, allowing Nike to collect massive amounts of data that it can use to better inform its product and marketing decisions. It has even made a push into the world of non-fungible tokens. Lululemon is far behind Nike in these areas.
Finally, in its most recent fiscal quarter (ended Feb. 28), Nike generated 64% of overall sales outside of North America. For Lululemon, that figure was just 15% in its fiscal 2021. And Nike can rely on its many marketing deals with global superstar athletes to boost its brand recognition worldwide. It would be difficult for Lululemon to try to compete with it on that playing field.
China is an interesting battleground for these two businesses. Based on store count, it is Lululemon's second-largest market (after the U.S.) with 86 stores. For Nike, the Greater China region is the third-largest segment by revenue and is usually its fastest-growing market. The global sports apparel market is certainly big enough for these two to coexist, but Lululemon may need to up its game.
Despite the 800-pound gorilla in the industry that is Nike, I still believe Lululemon has a good chance to reach its 2026 financial targets -- even if it may be a challenge. The business has tremendous momentum right now, is extremely profitable, and its brand continues to get stronger over time. These characteristics make it a hard stock to bet against.
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