Lululemon’s stock (NASDAQ: LULU), a company designing and selling athletic and casual apparel, gained roughly 40% – increasing from about $232 at the beginning of 2020 to around $324 currently, outperforming the S&P500, which grew 29%. Why? While store closures and costs did weigh on Lululemon’s results in 2020, it still benefited from the advent of remote work during the pandemic. The company is doing exceptionally well, thanks to its loyal customer base and unique product portfolio. The athleisure company is also expanding 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. To add to this, the company is also planning to launch its own technical line of footwear in early 2022. That said, the company is showing plenty of opportunities to keep expanding going forward. We discuss more in the sections below.
But is this all there is to the story?
No, not quite. Despite the company’s stock rally, Trefis estimates Lululemon’s Valuation at about $352 per share, around 9% above the current market price based on two key opportunities.
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The first opportunity we see is Lululemon’s Revenue growth over the coming years. 2020 was a decent year for Lululemon’s top-line expansion (11% y-o-y growth) even as most of its stores temporarily shut down during the pandemic in the first half of the year. On the e-commerce front, online revenues surged a robust 101% y-o-y and accounted for 52% of its top line in 2020. These revenues helped the company achieve its 2023 goal of doubling its e-commerce revenue from the 2018 levels, which was three years early. It should be noted that the retailer was able to grow its total revenues at an annual growth rate of 24% and 21% in 2018 and 2019, respectively. While the pandemic obviously slowed Lululemon’s growth in 2020, the company’s management is guiding for revenue growth of 27% y-o-y in 2021. Looking ahead, the company foresees international growth and store expansion as a critical strategy. In addition, the company is also expecting the monthly subscription fee of $39 from its Mirror platform to convert into a recurring revenue stream. While this interactive fitness platform of Mirror is still in its early stages and represents less than 5% of its total revenue, Lululemon’s footprint at 521 locations should be able to provide a wider distribution channel to this product going forward.
The second key opportunity stems from Lululemon’s valuation multiple compared to its peers. The stock now trades at a premium of 54x its projected 2021 earnings per share of about $6.49, per Trefis estimates. This is higher when compared to its peer, Nike, trading at 41x forward earnings. However, we believe that Lululemon deserves this premium in multiple, given the strong revenue growth it has posted over the past years, and a trend that is expected to continue going forward. For perspective, Lululemon’s revenue grew a large 66% between 2017 and 2020, compared to a 10% growth for Nike over the same period. (Since Nike’s fiscal year ends in May, we have taken the comparable period revenue for comparison i.e. Q3 FY2020, Q4FY 2020, Q1FY 2021, Q2Fy 2021). While we acknowledge that Lululemon’s revenue base of just over $4 billion (in 2020) is much smaller compared to around $38 billion for Nike, still the growth Lululemon has posted is meaningful. Now, if we were to look forward, Lululemon’s revenues are expected to grow 52% over the next two years, compared to a 30% growth expected for Nike.
To further strengthen our argument on Lululemon’s multiple, let us look at the bottom line expansion. Lululemon’s earnings have grown a whopping 137% between 2017 and 2020, and this compares with a 23% decline for Nike. In addition, Lululemon’s earnings are expected to grow 81% over the next two years, compared to the 43% growth expected for Nike. As such, we believe Lululemon deserves to trade at a premium over its peers, and we believe a P/E multiple close to 54x will be appropriate for the stock. Our price estimate of $352 for Lululemon stems from a 54x P/E multiple and $6.49 in earnings per share in 2021. This implies around a 9% premium to the current market price of $324.
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