Lululemon (NASDAQ:LULU) has seen incredible growth over the past few years, mainly thanks to its loyal customer base and trendiness among young generations. This tailwind has been strong and is likely to continue, however prior to the upcoming 2022 Q3 earnings report on December 8th, investors should be aware of the increasing headwinds now facing the company. The stock’s valuation is becoming increasingly expensive, while macroeconomic conditions and consumer spending trends are forecast to get worse.
In recent weeks, there has been growing excitement in regard to Lululemon’s future performance. Reports from Piper Sandler and Morgan Stanley showed the company as one of the most popular clothing brands and one of the biggest Black Friday holiday sales winners respectively. This data points to a bright future for the brand and its stock, as more and more people become aware of its products and trends.
Nevertheless, we believe there is a risk of pricing for perfection, as investors have become overly optimistic of the company’s future potential. The U.S. is expected to enter a recession in 2023, with manufacturing output contracting and the IMF continuing to downgrade world economic growth expectations. Consumer spending is expected to slow down significantly, and Lululemon operates in the premium market, making it more vulnerable to budget cuts.
In the long term, Lululemon may continue to thrive, but in the short to mid-term, the headwinds are likely to be stronger than the tailwind. Recession possibilities and consumer strength may create a significant hurdle going into 2023, and investors should be cautious of the worsening macroeconomic headwinds and valuation risks.