If you think getting consumers to pay for an extra streaming service is hard right now, let’s see how difficult pedaling $100 yoga pants will be during a recession.
While recession risks could hurt consumer discretionary stocks, one company — Lululemon (NASDAQ:LULU) — wants investors to focus on its recently announced 5-year ambitious growth plan.
Lululemon succeeded by staying in its own lane…
Founded in 1998, Lululemon sells high-end athletic wear targeted at health-conscious professionals and healthy lifestyle enthusiasts.
Lululemon is the fastest-growing company among major athletic apparel brands helped by its athleisure dominance. Here’s how Lululemon achieved its record 2021 sales during a global pandemic…
- Men’s business: Lululemon had a target to double men’s sales by 2023 — and hit that target two years ahead of schedule.
- E-commerce: Digital sales tripled between 2019 and 2021, helping to grow revenue by 40% in 2021.
With consumers homebound, the athleisure category grew 53% in 2020 per Kantar. Like many other COVID trends, growth began slowing as consumers moved back to their normal lives.
So far, work-from-home is still sticking. A GlobalData survey in the first quarter of 2022 showed that two out of five consumers have continued to work from home.
With a five-year total return of 571%, has easily beat the S&P 500 — but can it continue to outperform?
Has the company changed its athleisure focus?
To achieve its goals, Lululemon wants to expand its product line beyond high-end activewear:
- Memberships: In 2020, Lululemon acquired Mirror – an at-home workout platform costing $39/month.
- Sneakers: Last month, Lululemon launched its first line of sneakers – expanding into the competitive footwear business.
- Resale program: Lululemon’s “Like New” resale website lets customers trade in and buy used products.
The goal by 2026: Double men’s sales, double e-commerce sales and 4x international revenue. But analysts are worried that Lululemon’s new plans could distract it from its core business. Global expansion could hurt margins — at a time when core product growth is slowing.
Bank of America’s Lorraine Hutchinson remains optimistic — seeing many “untapped opportunities across channels, geographies, and product lines.”
Investors: How essential are $100 leggings?
This year, consumer staples (i.e., essential goods) have vastly outperformed consumer discretionary stocks.
- Consumer Staples Select Sector SPDR Fund (NYSE:XLP) — is up 2% this year.
- Consumer Discretionary Select Sector SPDR Fund (NYSE:XLY) — is down 17.6% this year — nearing bear market territory.
While chasing consumer staple stocks at all-time highs might not be a great idea, it’s also risky to invest in consumer discretionary stocks as spending slows.
Lululemon’s plans depend on one big question: How much are consumers willing to pay for premium leggings during a recession?
