Lululemon Stock Up 57% This Year, Where Is It Headed?

-11.99%
Downside
443
Market
390
Trefis
LULU: lululemon athletica logo
LULU
lululemon athletica

[Note: Lululemon’s FY’22 ended on January 29, 2023]

After rising 57% since the beginning of this year, at the current price of around $507 per share, we believe Lululemon (NASDAQ: LULU), a company designing and selling athletic and casual apparel, could see modest declines in the long term. LULU stock has increased from $323 to around $507 year-to-date (YTD), compared to a 25% growth in the S&P index. In recent weeks, the company’s shares have soared following improving stock market sentiment, its inclusion in the S&P500 index, and strong financial results. The company shares are up almost 28% in the last two months, and we believe are slightly overbought. A price-to-earnings multiple of 41x is much fairer for the company, we believe, when using our estimated FY’23 EPS projection. The company is currently trading at a 64x price-to-earnings ratio. Going by our Lululemon Valuation, with an EPS estimate of around 10.96 and a P/E multiple of 40.7x in fiscal 2023, this translates into a price of $446, which is almost 12% lower than the current market price.

LULU stock has seen extremely strong gains of 45% from levels of $350 in early January 2021 to current levels, vs. an increase of about 25% for the S&P 500 over this roughly 3-year period. However, the increase in LULU stock has been far from consistent. Returns for the stock were 12% in 2021, -18% in 2022, and 57% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 23% in 2023 (YTD) – indicating that LULU underperformed the S&P in 2021. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and HD, and even for the megacap stars GOOG, MSFT, and AAPL. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could LULU face a similar situation as it did in 2021 and underperform the S&P over the next 12 months – or will it see a strong jump?

In Q3, Lululemon’s total revenue was up 18.3% year-over-year (y-o-y) during the quarter on a constant dollar basis to $2.2 billion, led by a 49% jump in international markets and a 12% gain in North America. Its direct-to-consumer revenue rose 18% y-o-y and accounted for 41% of total sales. In addition, comparable sales at stores were up 13% during the quarter or 14% on a constant-currency basis. The company’s gross margin was up 220 basis points y-o-y to 58.1%. Also, its adjusted operating margin increased 80 basis points during the quarter to 19.8% of sales. Consequently, the retailer’s Q3 adjusted earnings jumped 27% y-o-y to $2.53 per share. LULU opened 14 net new company-operated stores during the quarter to end with a store count of 686.

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For the full year 2023, Lululemon sees sales of between $9.549 billion and $9.584 billion, a slight boost from the $9.51 billion to $9.57 billion that the company projected previously. Adjusted earnings are likely to come in at $12.34 to $12.42 per share, up $0.25 to $0.32 per share from earlier predictions. Although management raised its outlook for 2023 on the back of a strong third-quarter performance, the fourth-quarter sales projections of 13-14% were lower than expected (also a slower growth rate from Q3 2023), probably due to uncertainty in the economy.

The company remains on track to achieve its Power of Three x2 goals it unveiled back in April 2022. The plan aims to roughly double its annual revenue from $6.3 billion in fiscal 2021 to $12.5 billion by fiscal 2026. For the full year, we forecast Lululemon’s Revenues to be $9.5 billion for the full year 2023, up almost 19% y-o-y.

It is helpful to see how its peers stack up. Check out how Lululemon’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Returns Dec 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 LULU Return 13% 58% 680%
 S&P 500 Return 5% 25% 114%
 Trefis Reinforced Value Portfolio 8% 38% 609%

[1] Month-to-date and year-to-date as of 12/20/2023
[2] Cumulative total returns since the end of 2016

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