Deep Dive
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Unlike Nike, where Nike is primarily a footwear business and athletic footwear that competes with about 10 companies, Lululemon, it competes with other athletic apparel businesses. But that's not all. They also compete with regular apparel businesses. And while Lululemon has done a great job, and we've said that forever, it's hard to kind of continue that growth when you're so big and other competitors are coming up the curve to take market share from you.
Hello and welcome to the Barron Streetwise podcast. I'm Jack Howe and the voice you just heard is Randall Connick. He's a stock analyst at Jefferies and he's talking about Lululemon, which reported financial results this past week. That stock has been a fairly popular one on Wall Street, but Randy has concerns. He's bearish. We'll hear about that and about why he recently upgraded Nike. But first, I'll say a few words about food insurgents.
Sounds dramatic when I say it like that. More so than just small food brands, which have been taking market share. It's dramatic either way. Listening in is our audio producer, Alexis Moore. Hi, Alexis. Hi, Jack. Are you drinking a poppy? Are you drinking a poppy right now? Is that what's happening? I am. I'm drinking two poppies. I don't understand. How...
Are you wearing one of those helmets with straws that go to two different cans or how's that working? I need to invest, actually. Oh, you've got two going because you're taste testing for us. Exactly. Now, I talked about, I mentioned Poppy like several weeks ago, something like that. And they just got bought this past week or two by Pepsi. Couple of billion dollars. What do you think of the taste? It tastes like a diet soda. It tastes like it only has five grams of sugar.
It tastes, I thought, faintly of vinegar. And do you know why it tastes a little like vinegar? Because there's apple cider vinegar. Because there's a little bit of vinegar, yeah. It's not magic. So they say this is a prebiotic.
I'm not sure what the point of prebiotic is. I've heard, um, what is it? Probiotic that's supposed to be good. So maybe this, maybe prebiotic is like on the road to get things happening. I don't know, but it, it sells like crazy and Pepsi is in, this is a big food brand, a big beverage brand.
taking over an upstart competitor. And that brings us exactly to what I'd like to talk about. I want to talk about Tony Chocolonely. I have seen these giant chocolate bars at the checkout at my local grocery. Yeah. They're like the size of something Moses brought down from Mount Sinai there. I don't, I don't buy them. I've never tried them because they're,
If I'm going to get chocolate, I'm probably going to just try to keep it under control and get something small. And these are big. But I saw the name recently in a JP Morgan analysis. And that analysis was about food upstarts that are taking market share from big brands.
And I'll come to that in a moment. I'll tell you a quick little story. And to do that, I'm going to have to pronounce a Dutch name, which I'm not great at. It makes me nervous. But the name is, I'm going to say Ton van de Koeken. This was about two decades ago. A Dutch television journalist by that name went on camera and he ate 12 chocolate bars and then he demanded to be put in jail.
And his crime, he said, was financing slavery and child labor. He said the big chocolate brands had pledged years earlier to stop using cocoa beans that were grown by children, but they hadn't, according to his reporting in West Africa. Now, the police declined to arrest him, so he prosecuted himself. He flew in a former child slave to testify against him.
and a judge declines to punish him. So Van de Keuken did something truly extreme. He started a chocolate company. And that, of course, is Tony's Choco Lonely.
If you're wondering where the name comes from, Tony apparently is like an English speaker's nickname for Tone, which is his name. And Chalka Lonely, according to company lore, according to what the company says, Chalka Lonely is supposed to refer to his lonely fight against industry exploitation.
There's a lot of backstory to this chocolate. You know, it's kind of marketed on the sourcing, ethical sourcing, that sort of thing. But there's a lot of symbolism. When you break apart a normal chocolate bar, it breaks into squares and you can share them if you're a person who shares or you could just eat them all yourself. When you break apart a Tony's Chocolonely bar, it breaks into odd sized bits and pieces.
And they say that's to represent the inequality in the cocoa industry and so on. This company sells its chocolate for its values. These bars are more expensive than other bars. If that's something that you're into, maybe you've had them or maybe you've at least seen them.
By the way, a judge might have declined to declare Van de Keuken guilty, but I declare him guilty of selling majority ownership in his company too soon. He sold it in 2011 to a Dutch businessman. And back then, the revenue for the company was around 1 million euros a year. Now it's hundreds of millions of euros per year.
The latest growth rate on the company is 33%. It's been accelerating. Last year, Walmart and Kroger added the brand. So if you've seen it, and by the way, the chocolate bars have these wrappers that use kind of brash coloring and these very big letters that look like they're kind of cut out from a magazine, this giant font. It's a very peculiar appearance. If you've noticed them in your store, you're certainly not alone.
That brand's hitting critical mass. It's only 0.6% market share in chocolate, but it's rising. Hershey's at 37% and Mars is at 26%. It's an industry that's dominated by giants. But here's a tiny insurgent quickly gaining share.
Bain and Company found that companies like that, food insurgents, they're generating 27% of industry growth, and they're doing it using brands that collectively hold less than 1% market share. So most of the growth right now is coming from tiny companies, not legacy brands.
I talked several weeks ago on this podcast about how big food is struggling. You can point to different causes. Obesity drugs, perhaps. Stretched consumer budgets, definitely. J.P. Morgan finds that private label goods are taking market share in 61% of the food categories it tracks.
That's a sign of those stretched budgets, of people are trading down to store brands. And that's one of the things hurting the growth of big brands. But here's another. J.P. Morgan finds that non-major brands are taking market share in even more categories, 67%. Not coincidentally, publicly traded food companies, the big ones, they've been losing market share to others for two years. And the rate at which they're losing share is increasing.
So that's just another reason for investor concern. Let me run you quickly through a few more brands.
Alexis, have you seen commercials for Tillamook on TV? You know about Tillamook? Absolutely. They had a Super Bowl commercial a couple of years ago. There's a new one. I saw it. I can't remember the details. There's a boat and there's a lot of like waving farmers that are that are eating ice cream and enjoying different dairy products. One one just bites directly into I think it might have been a block of cheese. I hope it wasn't a stick of butter. That's that's too much love for dairy.
But it was not a small bite. So Tillamook is the, it's a farmer-owned Tillamook County Creamery Association. That's in Oregon. And that one is up to 3.6% market share in cheese. It's a rapid gainer. It's about half the size of Sargento now and about one-third the size of Kraft Heinz. There's a company called Black Rifle Coffee. This is another one of what I would describe as cause brands.
They sell, to quote the website, coffee and culture to people who love America. They have different roasts of coffee. One's called Silencer Smooth, and another's called AK-47 Espresso.
Gun appreciation is the theme here. In other words, there must be a lot of gun lovers who love coffee or coffee lovers who love guns because the company is up to 1.9 market share in coffee pods. That might not sound a lot, but that's more than Starbucks has in coffee pods. It's not yet close to the giants in that space, Nestle and Keurig Dr. Pepper, who are at about 19% a piece.
ConAgra, they're very big in frozen dinners. They've got Marie Callender, Banquet, Hungry Man. The market share is dominant there, 36%. But how about Amy's Kitchen?
It's growing quickly. It's up to 4.7%. It's family owned. Their big sellers are Pad Thai, enchiladas, macaroni and cheese. Lived off that in college. Macaroni and cheese, boxed or frozen? Say boxed because it's going to bring me right to where I, you're going to land me right exactly where I want to be. Say boxed, say boxed. Amy's actually, but yes, boxed.
Boxed, not frozen. Not frozen. Funny you should say that. Kraft Heinz controls half of that category, boxed mac and cheese. Have you heard of a brand called Goodles? Goodles. Goodles. Doesn't ring a bell. You might not have. The company that makes it is called Gooder Foods. Goodles, the product, it's only three years old, so a lot of people might not have heard of it. Some of their varieties include Shall We Dance, Pause for Laughter, and...
Ched over heels. Nope. Revenue there doubled last year. They hit a run rate of more than a hundred million dollars. Market share over the past 13 weeks reached 2.2% for a three-year-old brand. That's not bad. If you're Kraft, you're keeping an eye on Goodles right now. There's a lot more of these I won't get into. Chomps meat sticks, lesser evil popcorn, Bear Bells protein bars.
And traditional medicinals tea. Alexis, are you someone, are you a story-driven consumer? Do you feel like you buy products based on what companies say about their ethical sourcing or production or the health benefits or maybe just the smallness? You know, this is a family business, that sort of thing. I think so.
I think the ethics matter. I love to support small businesses, but at the grocery store in the aisle, I'm buying based on the sale. You're not paying double for a story. Nah, I'm sorry. I think I'm with you. I like to get a good price on a big brand that I know. I buy some things on familiarity. Like there's some big brands I've been using for a long time. The last soap that I bought,
was ivory soap. The slogan there, right? I looked it up. 1895. It comes from the slogan is we're 99.44% pure. You've heard that, right? Yeah.
If you think about that, that's like a half percent they're not telling you. That's a 0.56 they're not even going into detail about. And I don't ask any questions. Frankly, it's pure enough. 99.44. I'm assuming it's not radium. It's not rhino horns. It's not anything really bad or I would have heard about it. So I'm okay. If you're mostly pure, I'm okay with that. I don't ask a lot of questions.
But I think that the point of this analysis from JP Morgan is that for a lot of customers out there, that's not the case. There's a lot of customers who are skipping over established brands and they're going for stories about health, about ethics, about smallness. And I think that could mean more market share losses for big food or just like with poppy, it could lead to some pricey deal making. And that's something that investors ought to be wary of. Which one is your favorite of the two that you're tasting?
Cherry limeade, I guess. That's all they call it? They don't give it a fancy name?
No. I mean, Goodles is over here killing itself with the puns, trying to come up with new puns for macaroni and cheese products. And Poppy's just throwing out normal flavors, huh? Well, they don't need that. Yeah. When you've got vinegar in the soda, you don't really have to play games with the name, right? It's the vinegar sells itself. I think they call that functional drinks. Like the sector is functional drinks. Functional meaning like when you open the can and pour it like into your mouth, it flows like a liquid and doesn't...
Does its basic job as a soda. Close. I definitely tasted the function. I can see what you're, I can see what you mean. And with that, let's go on to Lululemon. How about we take a quick break and then we'll come back to my conversation with Randy over at Jeffrey's about Lululemon and Nike.
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Welcome back. Lululemon. Why am I interested in Lululemon? Well, it's a big company and they just reported quarterly financial results. The results were pretty good, maybe mixed. Sales and earnings were ahead of estimates. Same store sales growth didn't look great. Results in the Americas didn't look great. And the guidance was below consensus estimates.
Also, Randy Connick over at Jefferies wrote a bearish case on the stock before the earnings came out.
I felt like that was a bold call and I like bold calls, so I wanted to hear more about it. Also, there's a yoga wear brand called Aloe and I feel like I've been hearing a lot about that. I feel like it's become quite popular and if that's popular, what does it say about Lululemon's popularity? I don't really know how the two brands compare. They both sell men's clothes, Lulu and Aloe. I once bought a book called Pilates for Golf. Please don't judge.
The movements were quite challenging. It's hard. Let's play a part of my conversation with Jeffries analyst, Randy Connick. Randy, I am not a yoga tights expert. That might surprise you to hear. Although I gather that Lululemon is selling a lot more than yoga tights these days. So you have a bearish view of the company. And one of your recent notes is titled, it's a question, how many more rabbits left in the hat?
What do you mean by that? Does it suggest that things have been holding up for them, but you don't think it will continue? What does that mean? Yeah, yeah, yeah. So good question. And thanks for having me, Jack. Look, I think what we've been focused on with this company is the idea that they're seeing a lot more competition, competition from the likes of upstarts and competition from the likes of the stalwarts like Nike. So here's a company, Lululemon, that's grown dramatically over the last decade, up to $10 billion of revenue.
But now that revenue base is starting to hit a wall of growth, right? Where you have the law of large numbers and to try to continue to grow what the company is doing is they're trying to grow into non-core categories. They do a great job in leggings. They do a great job in...
in men's pants, but they've done less of a great job in categories that are non-core, such as women's sweaters, women's skirts, et cetera. So what we're finding is a company that's kind of reached a tipping point where the growth is harder to come by, and they're trying to reach into that
bag of tricks or the rabbit coming out of the hat to sustain growth and to sustain earnings momentum in the business. Earnings have started to kind of slow, so has growth. The rabbit out of the hat refers to gross margins have been more, I guess, stagnant
solid than the market would have thought. So they've kept investors interested on the gross margin line while sales have slowed and promised a return to accelerating growth with new products. We think those new products aren't working. Those new products are not in the core. And we think that's going to be the problem for Lulu. Maybe not this quarter, but over the next couple of quarters as we go throughout 2025.
Take us on a tour for folks out there who maybe haven't visited a Lulu lemon store. I want you to tell us a little bit about maybe the history of what the stores used to look like and what they look like now. And as a starting point, I'm going to reference a note you wrote back in February.
And part of the headline there was welcome to the gap. So what does that, what does that mean? Welcome to the gap in reference to a Lulu lemon store. I love that you read all of our research. It's it's I really appreciate that. Someone is I'll tell my mom. It's great. But look, I think a decade ago, what was really interesting about this company is that it was primarily just a women's business, primarily just a yoga inspired business.
mostly leggings, and I guess perhaps sports bra kind of business. And in order to kind of grow the business over the years and try to attract non-dressers
target demographics, other people to increase the TAM, if you will, the business, the store has changed. So a decade ago, you would see, again, leggings and sports bras. A decade later, now they're trying to sell everything. And the reason we put up that note in February called Welcome to the Gap is because they're trying to sell everything to everyone. So everything from sweaters to skirts to logo sweatshirts, et cetera, that's just not what Lululemon does.
was based off of. It was a yoga-inspired apparel business. And now in order to try and grow, that's why the stores look markedly different from what they did a decade ago. We think it's a bad move. It's not sticking with the core aesthetic. We think it presents a lot of risk ahead for the business going forward. What do you see when you look at the stock price? And
How do you think that this might play out? I mean, this is not it's not a company that's going to collapse. No, no, no, no. Is it we're talking about or are we talking about going from growth to slower growth or no growth or sales declines? Or what do you see happening and what do you see priced into the stock? So we basically see a vision of a company where it goes negative growth in the United States in 2025.
offset partially by still solid growth in international markets, particularly in China. Where we're different from the street with Lululemon is we're projecting revenue growth in 2025 around low single-digit growth on total, whereas the consensus, the other analysts out there collectively think that Lululemon is going to still grow at a high single-digit rate on a total company basis in 2025. We think that's impossible considering that the US business is going to go negative. It's almost negative already.
If you think about that slowing growth trend line, and then you look at the market cap of the company, the market cap of Lululemon is above $40 billion. To give you some context around that, Nike, which is a massive, ubiquitous brand, and Nike's Coca-Cola, it's everywhere. Nike's had its troubles. We recently upgraded that name. But Nike right now has a market cap below $100 billion. Lululemon is above $100
$40 billion. And another competitor that's the same kind of size of brand to Lululemon on a retail-adjusted basis, Under Armour, the market cap of that company for all its struggles is less than $3 billion. So we're of the view that Lululemon has an elevated market cap and valuation for what it is. It's done well in the past.
It's struggling today. There's a lot of hope of improvement in the future. We think it doesn't happen. We think that the market cap's too high. And while we don't think it collapses, we do think the market cap at above $40 billion could go into the high $20 billion over this coming year. I want to ask you a little more about Nike. Last thing on Lululemon, this is a bold call, partly because as we speak, we're speaking just ahead of
an earnings report for Lululemon. And by the time people hear this, it might be after the earnings report. Sometimes a company like this comes out with numbers that surprise one way or the other, and the stock might jump a lot or it might dive a lot. But it sounds like your thesis isn't really about one particular quarter. I mean, is there anything that you what would you look for in this quarterly report that would either, you know, confirm
your take on the stock or that would make you, you know, have some second thoughts. - It's a great question. And we never have stock calls for quarters. This has been a journey, this name for a couple of years, same thing with our recent Nike call. But as it pertains to Lulu specifically,
what we're looking for in the print is this idea that there's continued softness in the U.S. business given competition and just some more difficult consumer trends generally. That coupled with the idea that the rabbit of gross margins being able to be sustained and strong over the last four to six quarters, that rabbit coming out of the hat no longer comes out of the hat, right? So the idea that we're starting to see some kind of
Headwinds forming for gross margin. The idea that the U.S. business continues to remain in a pressured way about to turn negative. And then international, the expectations are super high. Do we start to kind of come off that super high expectation a little bit internationally? But the real focus here is U.S. continuing to slow, about to go negative. And then gross margins that are high and have been sustained, about to crack and go down.
Let me ask you about Nike. So you recently turned bullish on the stock. We talked about it, I can't remember how long ago, on the podcast. And I'll tell you, everything that I recall is that the company has been going through a difficult stretch. I think there are a lot of new competitors out there and running shoes like the Hoka's and the On's and so forth.
and you know New Balance I wore them for so long everybody said it was a dad brand a nerd brand I paused and bought a pair of hokas to get cool and then all of a sudden everybody said New Balance is cool now so now I'm back on the New Balance so I guess the question is what do you think that they have fixed or what show what's a sign of improvement that you see with Nike
Yeah, the theme with Nike is a journey of improvement ahead. What we used to say over the last couple of years is just don't buy it, right? We didn't like the stock.
We said that there's issues with the CEO. There's issues with lack of focus on product innovation, and there's an imbalance in distribution. So that's the bad news over the last couple of years. And again, we said, just don't buy it. So what changed? What changed was the bad CEO got kind of kicked out, and they hired an executive that was at the business forever that had recently retired, Elliot Hill. So a person that comes in that
That's a culture carrier to improve culture very immediately at Nike. Second, that individual ran wholesale for Nike globally. So you can improve distribution or rebalance it to have wholesale and direct being focused on. And then also, you know, redouble efforts around innovation, right? Which is what you've seen out of obviously brands like Hoka, On Running, Nike.
new balance to your point as well. So the good news is the stock is kind of at a 10-year low on a price-to-sales basis. The market cap is back down to where it was a decade ago, the last time Nike had a problem. We probably upgraded a week
two weeks too early ahead of the quarter and the stock fell into the quarter or after the quarter. So it is what it is, but this is a two-year journey call, right? It's the idea that you're able to buy this name at 10-year low valuations on a price-to-sales basis. You've got the right CEO in place. You've got the right strategic direction, which is improved product, balanced distribution. Those will improve on the way because
The company recently kitchen sink the guidance so that expectations are super low. And at the end of the day, while we brought up those brands of Hoka and On Running and to your point, New Balance, there's a couple of things that are very important. Number one, Nike is still number one, right? And number two, there's really only 10 companies that matter in athletic footwear. And if those other companies gain a little market share, that's fine. But Nike is still the big player, right? It's still the Coca-Cola of the space. Right.
such that when you really think about Nike and contrast it with Lulu, Lulu has just been a good brand in a massive apparel category. Nike is the big brand and the top brand in a limited competitive set category, which is why we have so much conviction and confidence that the new CEO and these strategies of fixing product and balancing distribution can really affect change and improve business and earnings for the company, not next quarter for Nike, but over the next two years.
When you use the terms wholesale and direct, tell me if I understand this dynamic or if I'm off base here. My sense is that Nike, they used to do it, you know, like they had a very strong relationship with Foot Locker, for example. And then Nike said, you know what? We can make better margins if we sell more shoes directly over our website or over the app or what have you. So we're going to really focus the business there.
And Foot Locker maybe didn't love it because there was this whole thing about like hot new releases, which is, by the way, super annoying when there's these shoes that kids want they can't get. But that's a whole other story. But it seemed like something happened with that relationship where maybe Foot Locker was like, you know what? It's not gonna be a problem for us because we can give more shelf space to these other upstart brands that are doing well right now.
And now Nike is trying to repair some of those relationships. Does that sound about right? Look, I think you hit the nail on the head. I think what happened under the old CEO, a person that was a tech executive that didn't have this perspective, is the old CEO didn't understand that Nike is Coca-Cola, right? So with Coca-Cola, you want to be able to buy it in a deli.
in a supermarket at a Jets game. I am a Jets fan. It's terrible. But, you know, with Nike, the same kind of perspective, it's a ubiquitous brand that wants to be bought. People want to buy it wherever and everywhere. So I think under the old leadership team, the old CEO, he didn't understand that concept of ubiquity and the want of the consumer to be able to buy this product anywhere and everywhere. So, you know, that's what's lost. You know, going forward, we
The company is going to fix that problem. It's recognizing it needs to be everywhere because it is that ubiquitous type of brand. And it's now making those changes to more balance wholesale, improve the partnerships and relationships once again with a company like Foot Locker, to your point, and also then balance that with still selling in a direct way on their website, et cetera. So that's kind of where we're going versus where we've been over the last couple of years and the problems that ensued
Because of those strategic mistakes by the old CEO. Give us just a rough sense. I mean, it doesn't have to be the price target or anything like that. But what kind of upside do you think somebody gets in on a stock like Nike? And if it has the sort of turnaround you're expecting, where could it get back to? What could people expect in the years ahead if things go well?
Yeah, so our price target is $115 a share. The stock's $66 as we speak. So obviously that is a near doubling of the stock price from here. Now, it's not going to happen overnight. This is not going to happen in a quarter. This is a business that needs to go through a journey, right? A journey of
get back to Nike being Nike. And we think over the next year or so, you're able to kind of get the business moving in the right direction, the stock price coming off the floor and off the mat, if you will, and reestablishing itself and reasserting itself as...
you know, for what it is, it's Nike, right? It's the number one brand out there. It's a brand that's sold to everyone around the world, has a huge addressable market and, you know, is kind of made some self-inflicted wounds that they can fix upon going forward again over the next two years.
Thank you, Randy. And thank all of you for listening. If you have a question that you'd like played and answered on the podcast, send it in. It could be in a future episode. Record it with the voice memo app on your phone and send it to jack.how. That's H-O-U-G-H at barons.com.
Alexis Moore is our producer. She's been drinking double poppies this whole time. Have you tried mixing them together? I think that would be even worse, unfortunately. It might be good for washing down some goodles, goodles and cheese. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen. If you listen on Apple, write us a review. See you next week.