Why Has Lululemon’s Stock Jumped 3.4x in 3 Years?

Lululemon Athletica Inc’s. (NASDAQ: LULU) stock price rocketed from around $66 in January 2017 to roughly $225 now, led by strong revenue growth across all operating segments. Moreover, the strong growth of the athleisure market coupled with expanding net income margin has further aided the company’s stock price. Additional details about factors responsible for the sharp increase in stock price movement are available in our interactive dashboard What Factors Drove The 240% Growth In Lululemon’s Stock Between 2017 And 2019?, parts of which are summarized below.

#1. Revenues Grew 40% From $2.3 Billion In Fiscal 2016 to $3.3 Billion In Fiscal 2018 And Are Expected To Grow Nearly 20% In FY 2019 (ending January). The Biggest Change Has Been Driven By The Company’s Direct To Consumer Segment, Which Is Expected To Grow 2.5x From Its 2016 Levels

• Lululemon has achieved steady revenue growth over the last three years, adding nearly $1 billion to total revenue since 2016 at an average annual rate of 12%. Higher revenue growth has been driven primarily by new store openings and continuous growth of the digital channel
• Retail (stores) segment revenue grew from $1.7 billion in 2016 to more than $2.1 billion in 2018 led by accelerated store openings as well as strong comparable store sales due to higher footfalls and better conversion rates.
• Lululemon’s DTC (e-commerce) segment has also achieved robust growth in the last few years, with revenues nearly doubling from $450 million in 2016 to roughly $860 million in FY 2018. This growth can be attributed to an increase in traffic on e-commerce websites, improved conversion rates, and increased dollar value per transaction.
• We expect Lululemon’s total revenue to grow nearly 19% and reach $3.9 billion at the end of FY 2019, primarily driven by the growth of its DTC segment which is expected to cross $1.1 billion mark.

#2. Net Income Grew At A Steady Pace Due To Expansion In Net Margins. Net Margin Expanded 180 basis points over 2016-18 And Is Expected To Expand Another 100 Basis Points In 2019

• Lululemon’s net income grew nearly 60% over 2016-18, increasing from $303 million in fiscal 2016 to $484 million in fiscal 2018.
• This can be attributed to strong revenue growth and higher net income margins.
• Net income margin increased from 12.9% in fiscal 2016 to 14.7% in fiscal 2018 driven by lower product costs, a favorable mix of higher-margin product, and lower markdowns, partially offset by higher selling, general & administrative expenses.
• We expect Lululemon’s net income margin to expand by 110 basis points in 2019 led by a combination of lower expenses (as % of revenue) and a lower effective tax rate.

#2.1 Total Expenses Increased From $2 Billion In Fiscal 2016 To $2.8 Billion In Fiscal 2018. However, Total Costs As A Percentage of Revenue Have Declined From Around the 87% In 2016 to 85% In 2018. This metric is expected to further decline to 84% in 2019

• Additional details about how Lululemon’s individual expenses have trended are available in our interactive dashboard.

#2.2 EPS Has Also Seen Robust Growth, Led By Higher Revenue And Lower Share Count.

• Lululemon’s EPS grew from $2.21 in fiscal 2016 to $3.61 in fiscal 2018, driven by strong revenue growth, higher net income, and lower share count.
• No. of shares declined from 137 million in fiscal 2016 to 134 million in fiscal 2018, amid the company’s authorized employee share purchase plan to buy $600 million worth of common shares.
• We expect Lululemon’s adjusted EPS to reach $4.74 in 2019 and shares outstanding to further decline to 130 million.

#3. Price-To-Earnings Multiple for Lululemon Expanded Between 2016-2019. In fact, It Has Remained Well Above The Figure For Industry Leader Nike

• Lululemon’s P/E multiple expanded from 30.5x in 2016 to 40.8x in 2018.
• This compares with Nike, which saw it’s P/E expand from 23.2x to 33.5x during the same period. Notably, Nike’s share price also doubled over the same time frame, going up from around $50 levels in January 2017 to around $98 in December 2019.
• Details about our forecast for Nike’s P/E multiple are available in our interactive dashboard.

To summarize, the 240% increase in Lululemon’s stock price between early 2017 and now can be broken down due to the following changes in key operating metrics:

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