Jefferies analysts confirmed the rating as “unsatisfactory”. Lululemon Athletics (NASDAQ:) on Monday and a price target of $240, which implies risk of a decline of almost 35% from current levels.
In their note, the analysts focused on Lululemon’s Other Category segment, which posted revenue of about $1.2 billion in 2023, representing a compound annual growth rate (CAGR) of 36% from 2018 and 49% from 2021.
Interestingly, about 70% of this growth has occurred in the past two years, largely due to the popularity of The Everywhere fanny pack, Jeffries said.
“We conducted an analysis to understand the impact the fanny pack could have across the company in 2022 and 2023,” the analysts said.
“Assuming 1) 50% of the incremental Other Category revenue growth in 2022 and 2023 is driven by the fanny pack and 2) an attach rate (additional purchase of a clothing item) of 40%, our analysis implies an additional ~$630. M income received from the fanny pack. This includes ~$330 million from the fanny pack and ~$300 million through attachments.”
According to Jeffries, this means the company’s overall growth and earnings per share (EPS) were “artificially” boosted by revenue from the fanny pack and its accessories. They estimate the bag will contribute about 500 basis points to revenue growth and 350 basis points to earnings per share in both 2022 and 2023.
As a result, LULU’s tailwind is now turning into a headwind as demand for fanny packs declines.
“Interest in fanny packs is fading, Alo and Vuori are gradually gaining share, the sports category is slowing down, and fashion is changing (from skinny to wide-legged bottoms),” analysts note.
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“While valuation levels emerged after the Q4 report (currently ~23x 2Y P/E), we believe earnings per share will decline next year, so multiples will shrink further,” they added.