What’s Happening With Lululemon’s Stock?

by Trefis Team
Lululemon Athletica
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Despite an almost 50% rise since the beginning of 2020, at the current price of around $345 per share, we believe Lululemon Athletica’s stock (NASDAQ: LULU) still has more to go. The company designs and sells athletic and casual apparel in North America. While most of the apparel companies were struggling to stay afloat during the pandemic, strong demand for comfortable work-from-home clothing allowed Lululemon’s revenues to grow 3.5% year-over-year (y-o-y) in the three fiscal quarters of FY 2020. Although we believe the company remains fundamentally overvalued, trading at about 52x consensus 2021 earnings, Lululemon has momentum on its side, and there could be more room for gains in the stock. It should be noted that Lululemon’s comparable sales shot up 19% in the recent Q3 (ended Nov 1). This, in turn, led to a nearly 15% y-o-y growth in Lululemon’s earnings, suggesting that the apparel retailer’s stock still has plenty of upside in the long run.

Lululemon’s stock is already about 342% higher than it was at the end of 2017. Our dashboard, What Factors Drove 342% Change in Lululemon Athletica’s Stock Between FY 2017 and Now?, provides the key numbers behind our thinking, and we explain more below.

Some of the stock price rise in the last 2 years is justified by the roughly 50% growth seen in Lululemon’s revenues from $2.7 billion in 2017 to $4.0 billion in 2019. This combined with a 1.6x jump in net income margin from 9.8% in 2017 to 16.2% in 2019, and a reduction in share count due to stock repurchases worth $700 million, helped the earnings per share basis swell 160%. Notably, Lululemon’s margin expanded as a result of robust revenue growth along with lower product costs, a favorable mix of higher-margin products, as well as lower markdowns.

Finally, Lululemon’s P/E ratio grew from about 41x at the end of 2017 to 47x at the end of 2019. While the company’s P/E has now increased to 70x, it seems to be overvalued when the current P/E is compared to levels seen in the past years – P/E of 47x at the end of 2019 and 41x as of 2018. But still, the company’s stock will likely continue to gain further, as it currently remains a favorite in the teenage and adult women apparel category. Further, Lululemon’s focus has shifted rapidly to digital transformations due to Covid-19, and it seems to be paying off.

So how has Coronavirus impacted the stock?

Lululemon is doing exceptionally well, thanks to its loyal customer base and unique product portfolio. To add to this, the advent of remote work has helped Lululemon flourish during the pandemic. In Q3, the athleisure company’s revenue increased 22% y-o-y to $1.1 billion. The retailer found a dramatic shift in revenue generation from stores to e-commerce, as its direct-to-consumer segment increased by 94% y-o-y to account for 43% of total sales (vs. just 27% last year). Going forward, the athleisure company also stated that it sees Q4 revenue growth at the high end of its mid-to-high teens expectation and Q4 EPS at the high end of its mid-single-digits expectation.

Lululemon also expanded into in-home fitness with its acquisition of MIRROR for $500 million, which offers one-on-one and group floor workouts from the home and plans to broaden its offerings into things like meditation. In addition, the company has managed to initiate a share buyback program of up to $500 million. This represents only around 1% of the current market cap, but is a good sign in any case.

While LULU stock may be overvalued now, 2020 has created many pricing discontinuities that can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Amazon vs Etsy

See all Trefis Price Estimates and Download Trefis Data here

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