Jefferies Analyst Randy Konik joins Yahoo Finance Live to discuss the Lululemon consumer, international concerns for the brand, and Jefferies’s ‘Underperform’ rating on Lululemon.
- Shares of Lululemon, they are moving higher here pre-market, just barely. And that's ahead of the company's earnings this week. But our next guest says despite an expected strong quarter, long-term expectations for revenue and international sales may be too aggressive. Jefferies Lifestyle and Growth Platforms Analyst, Randy Konik, joins us now.
Look, at the end of the day for Lululemon, what are they going to have to prove to the markets and to investors in order for them to continue to reward what is an otherwise kind of murky environment that Lululemon finds themselves in right now, where they've got to spend higher just to make sure that they're getting inventory in new categories to the stores and in some of the categories that the fans, the lovers of their apparel know them for?
RANDY KONIK: Yeah, look, thanks for having me on. But I think the simple answer here is, can the company be immune to the surroundings around them? So it's pretty simple. We see inflation at 40-year highs. We see consumers starting to trade down, as reported by a number of other retailers in the space across apparel, across electronics.
You know, the consumer is basically being more challenged. Now, that being said, we know that Lululemon has a customer base that skews to a higher income. But they also have a fair amount of consumers that are less high income, which we also think are at risk. And I think while the quarter is not at risk, they're actually probably going to beat the quarter, everyone knows it.
And I think the bigger issue from here is, how can the company sustain the momentum with all these challenges ahead? I think the biggest risk that we talk about in our published notes is we talk a lot about the men's business and international, in particular, where if you look out the next five years, half the incremental growth from the company is supposed to come from international markets.
And what are we seeing right now? We're seeing gasoline-- gas, natural gas prices up through the roof in Europe. We see issues with COVID lockdowns still occurring or the aftermath of that in Asia. So there's a lot of issues ahead, especially for the different end markets that Lululemon wants to have a lot of growth from in the years ahead.
- Randy, then look, Lulu-- they're not going to hit those five-year targets. They came out what, April investor day, really putting out some pie-in-the-sky type of targets. I mean, how bad a warning could they dump on investors here?
RANDY KONIK: Yeah, look, it's not about the next-- this quarter on Thursday. We don't think they actually warn about the long-term on Thursday. What they're likely to do on Thursday is likely beat the quarter, as I said. Everyone knows they're going to beat the quarter and likely reiterate guidance for the year.
Remember, after the reported first quarter results, they raised the outlook for the year. So they've already raised it once. Given that the environment is a little bit more challenged in terms of promotionality into the back part of the year and especially holiday for the fourth quarter, we don't see the company likely raising their-- their annual targets.
We think the biggest issue for them from a long-term guidance perspective is likely to come with fourth quarter results as they report them in early 2023. That's when they're likely to moderate those, we think, medium and long-term projections, simply because the environment around them is just too challenging. You know, not only is the consumer in Europe about to fall, potentially off a cliff, we see the dollar at 20-year highs. That's not going to help on a translation perspective.
And we think when the company gave these out, this outlook at their analyst day in the spring of 2022 for the next five years, they weren't contemplating, or they didn't see obviously, issues around them as it relates to a more challenged international consumer across Europe and Asia. They didn't see or contemplate or give credence to rising competition in the United States from companies like Rhone and Vuori, which are growing dramatically on the men's side of the business.
So we think that's going to be the issue ahead. Again, don't expect the quarter to be difficult at all when they report on Thursday. Expect a very good quarter. But everyone knows it, and we think over the next couple of quarters, that's when they're going to have to downgrade their earnings forecasts over the next five years.
- Yeah, I've been dabbling in that Vuori. Funny you mentioned that, Randy, very soft against my skin. I like it when I work out. It's a good brand that I just came across.
But you know, yesterday, I told a tale. I recently went to a Lululemon store, went to pick up three packs of underwear. Didn't even really think about the price. And they were $40 a pop. And this was $130 purchase for me, which I think just reflects them pushing through a lot of price increases. How much further can this company raise prices in an environment where there's a lot of promotions?
RANDY KONIK: I think you brought up a great point. If you look at all retailers, forget Lululemon for a second-- if you look at the comp store sales, promote almost every single retailer in the United States, what are you seeing? You're seeing a slowing transaction contribution. You're seeing that most of the comp store sales that are being recorded driven by average unit retail increases, to your point, price increases.
There's only so much that a company is going to be able to take price and drive growth in total revenue going forward. We think that's going to be a risk, especially when the environment around the company is getting more promotional. We-- remember this. Last year in 2021, US retailers saw their lowest promotional posture in 25 years. I've been doing this for 22 years, and they had literally no markdowns.
For Lululemon, if you think about expectations going forward, again, at their analyst day in the spring, they talked about low markdown rates, and then they talked about an expectation that the markdown rates would stay low, which we think is very, very risky because companies like Adidas, Nike, when they last reported, what did they talk about? They talked about moderating their gross margin assumptions because of promotions going up across the industry.
So at the end of the day, we think Lululemon is going to have a problem continuing to just raise price to drive same-store sales growth. And then on top of that, think about what you just said. You bought some underwear. You may have bought some Lululemon pants. We're guys. How often are we going to continue to replace those pants going forward? So in the pandemic--
- Hey, Randy, I'm always buying underwear, man. I'm always out there. You got to stay fresh with the underwear, my man. I mean, come on. Let's be real.
RANDY KONIK: I hear you. But think about the pants for a second. As-- the company-- as everyone goes back to work or goes back to the office-- I'm not in today-- you know, obviously, people-- that has been a good catalyst for men to buy, let's say, some incremental Lululemon pants.
However, going forward as we think about 2023 and beyond, the replacement cycle for men's product is a lot longer than the replacement cycle for women's products. So the company has done a great job. You know, we have to give them kudos for doing a great job in their men's business, growing international to here, doubling the business from $3 billion to $6 billion over the last three or four years, Lululemon has.
What-- what we think is a real issue is company going through $3 billion to $6 billion is easier than a company going from $6 billion of revenue to $12 billion in revenue that they've forecasted over the next 12 years with challenges ahead.
- Randy, I got to be quick here. But when you think about the shoe category, Lululemon of course, spending a lot of money to try and make that a reality for their business going forward from here. What do you need to see in order to be convicted that they can actually take market share and retain it?
RANDY KONIK: They're not going to be able to take market share. I think the biggest issue with their footwear business is the issue of strategic direction. This is a carbon copy of what happened at Under Armor seven years ago. Remember, Under Armor did a couple of things. Real quick, one, they put big logos on their products. Two, they went into footwear a little bit before that. And then three, they added those fitness apps thinking that people using the fitness apps would buy more Under Armor products.
At Lululemon, you're seeing a similar kind of strategy. Let's go into footwear. Let's buy the mirror business. You know, the mirror business isn't working. Their footwear business isn't working. It's going to take a lot more of their time away from their-- selling their Core Leggings and a product-- their apparel product. We think that strategic mistake is the biggest mistake.
But at the end of the day, that footwear isn't going anywhere for Lululemon.
- Big fans of your research. Keep it coming. Jefferies analyst, Randy Konik, always good to see you. We'll talk to you soon.