Jefferies analysts reiterated an Underperform rating on Lululemon Athletica (NASDAQ:LULU) on Monday and a price target of $240, implying a downside risk of nearly 35% from current levels.
In their note, analysts focused on Lululemon’s Other Categories segment, which generated approximately $1.2 billion in revenue in 2023, marking a compound annual growth rate (CAGR) of 36% since 2018 and 49% since 2021.
Interestingly, about 70% of this growth occurred in the last two years, significantly driven by the popularity of The Everywhere Belt Bag, Jefferies highlighted.
“We ran an analysis to understand the impact the belt bag could've had on the total company in 2022 and 2023,” analysts said.
“When assuming 1) 50% of the incremental "Other Categories" revenue gains in 2022 and 2023 stemmed from the belt bag and 2) an attach rate (additional purchase of an apparel item) of 40%, our analysis suggests an incremental ~$630M in revenue generated by the belt bag. This includes ~$330M from the belt bag and ~$300M via attachment.”
This, according to Jefferies, means that the total company growth and earnings per share (EPS) were “artificially” boosted by the revenue from the belt bag and its attachments. They estimate that the bag has contributed about 500 basis points to revenue growth and 350 basis points to EPS in both 2022 and 2023.
As a result, LULU’s tailwinds are now turning into headwinds as demand for the belt bag declines.
“Belt bag interest is fading, Alo and Vuori are gaining incremental share, the athletic category is slowing, and fashion is shifting (from skinny bottoms to wide-leg bottoms),” analysts noted.
“While valuation levels have come in since the 4Q print (currently ~23x FY'2 P/E), we believe EPS goes down next year, so multiples will compress further,” they added.