Lululemon (LULU) & Match (MTCH) — Portfolio Management & a Jefferies Note — April 06, 2024
Portfolio Management
I’m quickly losing conviction in my Match Group position. Top-of-funnel weakness at Tinder and across its other apps cannot be offset by strength at Hinge. They have not shown any ability to repair that top-of-funnel and my skepticism over them ever doing so is growing. Candidly, I just recently became single a few weeks ago. I downloaded the app to explore and the ecosystem is pretty shady. It’s full of bots and people trying to promote other “social media” (AKA Only Fans) accounts. It’s a ghost town, and I’m in the Miami area. Tinder seems to be dying, and new leadership seems to be incapable of preventing that death.
So? I see Lululemon at 18x forward EBIT. I see its 17% Y/Y GAAP EBIT growth expectations. And I see it being punished for missing annual profit and revenue guidance by 1.0% and 1.7%, respectively. I visit its stores and see them consistently packed with its new men’s shoes performing extremely well across all 3 locations that I visit. Anecdotal, but still. I juxtapose that with Match Group trading at 14x forward EBIT, flat Y/Y operating profit growth, and its largest asset showing real signs of decay. And? I’m left with a desire to trim Match Group as Lulu falls so I can buy more shares of that higher quality company at similar multiples. I did that later last week as Lulu fell toward $360. I will do it again if Lulu falls to somewhere around $340. It’s a bit of a race right now between when my next cash infusion comes and if Lulu reaches that next buy target. If the former comes first, I’ll use cash to accumulate. If the latter comes first, I’ll trim another 12% of my Match stake to add more Lulu. That’s the plan. Ideally, I want to own Match for one more quarter to see if they can show real signs of progress. Match has been very disappointing to me and I’m not willing to endure that disappointment for much longer.
Jefferies Note
Along the same high conviction in Lulu lines, I wanted to discuss a bearish note from Jefferies this week. In it, the headline was “losing market share to Vuori and Alo.” I found that to be a bit irresponsible. Why? It was based on a survey of 500 random people saying they’re spending more money at the other two than they used to. That’s not only wildly anecdotal and only based on U.S. data, but it is also not a causal relationship. It doesn’t mean Lulu is losing apparel wallet share. These outcomes are far from mutually exclusive. LuLu has explicitly talked up more market share gains throughout all of 2023 and into 2024. Athliesure simply continues to gain share of the apparel market, and Lulu was never going to have a monopoly of a $350 billion industry compounding at a 9% Y/Y clip. That’s just not realistic. Are Vuori and Alo doing well? They’re private, so who knows… but let’s assume they are. The apparel pie here is massive and, again, Lulu’s piece keeps growing.
Jefferies has been bearish on Lulu for two years now (maybe the pants just don’t fit the analyst well?). Generally speaking, Lulu has been and remains a sell-side darling. Jefferies however, calls it the “next Under Armour,” which I just could not disagree with more. The brand is pristine (see its margin profile vs. peers), awareness is still very low (especially ex-North America), fabric innovation is unmatched and so is its pace of evolving with fashion trends. But most importantly, the leadership team here is miles better than Under Armour’s ever has been. These items are all subjective; Lulu’s consistent financial results are the concrete evidence.
This is not a fad. A fad does not profitability compound for nearly a quarter-century. A fad does not grow through the Great Financial Crisis. This, in my view, is a juggernaut of a brand in the making that had a slightly underwhelming quarter. Investors are stressed about slightly underwhelming guidance misses, which came with hints from the team that the outlook is conservative. They’re concerned over slowing growth when that growth will accelerate later in the year as comps get far easier. The first half of the year will comp over growth that is several percent higher than its long term targets, so of course those rates will be slower. Regardless, it’s well on its way to meeting or exceeding 2026 targets.
I would need to see more disappointment this year for me to even begin to change my bullish view. There are very few dips that I feel more confident in buying than Lulu’s, and that will remain the case until the facts change materially. My stance is always wide open to evolving. This last quarter didn’t come close to fostering any mindset change here.
