How Lululemon will benefit from international growth: Analysis

Shares of Lululemon (LULU) have reached a new record high, prompting TD Cowen Managing Director John Kernan to raise his price target to $553 based on cheap valuation relative to long-term growth prospects.

While domestic slowdown concerns persist amid competition, Kernan sees international expansion offsetting the decline. He adds that China has been a "tremendous growth vehicle" for the apparel company, with Cowen estimating 2024 revenue increasing to $1.5 billion. As earnings lie ahead, Kernan will be eyeing the fiscal year 2024 top and bottom line outlook, but expects "a lot of upside" remains.

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Editor's note: This article was written by Angel Smith

Video Transcript

- Lululemon shares, they're hitting an all-time high. And according to our next guest, the fitness brand has a lot more room to run. He raises his price target to 553 that's well above consensus, saying the brand has lots of potential overseas. John Kernan is from TD Cowen and joins us now. John, it is good to see you. So you keep your outperform rating here, John. You're a believer. You raise your price target to 553. That's up from 549. How come, John? Walk us through the reasons for that.

JOHN KERNAN: Yeah, it was just us going through our model and looking at where we think earnings estimates can be for 2024 and '25. And the valuation, I think, is cheap here relative to the company's long-term growth profile. And we think consensus estimates are pretty conservative for both top line and margins as we look into next year.

- Well, let's address why they're conservative, John. Hey, it's Julie here. Just that there's been some concern about deceleration in sales domestically. And the company has come out with some new stuff, right? They've come out with men's footwear, for example. Do you think that the market's getting it wrong in terms of that deceleration that maybe some of these measures are going to help juice the sales a bit?

JOHN KERNAN: Absolutely. I do think people are concerned to an extent. I mean, the stock is down about 10% from its all-time highs it set back in January when they raised guidance. I think that's on the concerns of the domestic business is probably growing very low double digits. We model it at 10% domestic being North America and Canada.

International is growing in excess of 40%. So international has become a much bigger portion of the overall growth profile. And I think it will continue to carry the growth profile as we go into next year. Domestic had very difficult comparisons. Lululemon had a monster holiday 2022 when sales in North America were up over 30%. So it's a bit of just tough comparisons. But investors are focused on some of the competitive headwinds that have emerged as well as just the natural slowdown in sales off of tough comparison.

- And, John, just digging into China specifically, how do you see their business in China kind of evolving from here, John? And any concerns about maybe, you know, home-grown competition over there?

JOHN KERNAN: China has been tremendous growth vehicle for the Lululemon brand. China revenue is going to grow over 50% in fiscal '23. We model it up another 35% in fiscal '24 to 1.5 billion. We think there's a lot of white space. The same-store sales results in China, which they don't report, but we can back into, we think are growing in excess of 30%.

So clearly they are scaling at a very rapid rate. We don't think the competition, the local competition operates in the same price points and level of innovation that Lululemon does. So we think they're the leader right now in high-end premium athleisure in China.

- John, the company reports about a month from now. What is going to be the most important number or most important comment that you're going to be zeroing in on to hopefully for you sort of confirm the view that you have on the stock?

JOHN KERNAN: Absolutely. The-- they-- they've already raised guidance for Q4. So Q4 is pretty much in the books. There was a little bit of concern whether January finished a little slower versus where they were running in December.

But they already raised their guidance for Q4. It's really going to focus on the top line and EPS outlook for 2024, which we think is going to come right in line with consensus. And we think as the year goes on, we think there's going to be a lot of upside to consensus, particularly on EPS line.

So people will be focused on comps. Lululemon doesn't report comps by region. But they do report growth by region. So international, domestic will be dissected pretty closely. People want to hear what they have to say on some of the newer categories like you mentioned and some of the materials innovation that they've announced recently.

- Should be interesting. Thanks for that roadmap, John. Appreciate it. Take care.

JOHN KERNAN: Thank you.