Breaking News
Investing Pro 0
Cyber Monday Extended SALE: Up to 60% OFF InvestingPro+ CLAIM OFFER

Lululemon Should Be On Your Shopping List

By Vincent MartinStock MarketsSep 15, 2022 13:02
ca.investing.com/analysis/lululemon-should-be-on-your-shopping-list-200526493
Lululemon Should Be On Your Shopping List
By Vincent Martin   |  Sep 15, 2022 13:02
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
LULU
+4.68%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
DXY
-0.57%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
GPS
-0.41%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
NKE
+3.24%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
TGT
+0.42%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
WMT
-0.36%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
  • Lululemon’s second-quarter earnings were astounding in the current retail context
  • Q2 should comfort investors worried about how the company will fare amid inflationary and recessionary risks
  • Valuation is high, but like its products, LULU is worth it

It’s worth putting into context just how impressive second-quarter earnings from Lululemon Athletica (NASDAQ:LULU) truly were.

Yes, the company crushed analyst estimates in the quarter, and gave a full-year outlook above Wall Street consensus. But that’s not the most important aspect of the release.

What’s impressive is the performance relative not to expectations, but to the rest of the apparel industry, and indeed retail as a whole. Lululemon is thriving while essentially everyone else is struggling.

Thanks in part to a post-earnings rally, LULU admittedly isn’t cheap. But the stock hasn’t been cheap for years, yet it’s been one of the better performers of the past decade. As far as large-cap names, there’s a case that the same will be true over the next 10 years as well.

Lululemon Weekly Chart
Lululemon Weekly Chart

Source: Investing.com

Apparel Retailers Struggle

In 2021, consumers were buying things, apparel included. Even struggling mall retailers posted strong revenue growth. Importantly, they did so without the discounting and promotions that had marked the pre-pandemic environment. As a result, operating margins soared.

In contrast, 2022 has been a completely different story. With normalcy returning, spend on travel and experiences has returned. Labor Day air traffic in the U.S. exceeded pre-pandemic levels. With so much new stuff clogging closets, there simply is far less need for new apparel.

As a result, same-store sales have plunged across the industry. Even the biggest and best retailers like Walmart (NYSE:WMT) and Target (NYSE:TGT) dealt with billions of dollars in excess inventory. Smaller specialty retailers have seen their profits — and, in most cases, their stock prices — return to 2010s levels.

Add inflationary pressures, and the environment for retail is as difficult as it’s been since the financial crisis — at least.

Lululemon Thrives Anyway

But none of those headwinds were apparent at all in Lululemon’s second quarter. Comparable-store revenue increased a sizzling 23%, even with a two-percentage-point hit from the stronger U.S. dollar. Adjusted operating margins increased slightly.

In the release, Lululemon offered comparisons to the second quarter of fiscal 2019. Over that three-year period, revenue more than doubled. Gross margin expanded and adjusted earnings per share rose a sizzling 135%. Inventories did rise sharply, but management insisted that the inventory was appropriate for the sales expected in the second half of the year.

In any environment, that type of growth would be impressive. In this environment, it’s astounding.

Is Performance Priced In?

In terms of the business, it’s difficult to find a concern. This is a quality business that clearly has struck a chord with consumers worldwide. (About one-third of sales so far this year have come from outside the U.S.) Operating margins over 20% are among the highest in the industry, showing that consumers are willing to pay up for Lululemon quality.

Competition is far in the distance. Gap Inc. (NYSE:GPS) has its Athleta nameplate, but its sales and margins are far below those of Lululemon.

The only real question is the stock price.

Given guidance, which usually is conservative, Lululemon should generate about $10 in adjusted earnings per share. That implies a 34x price-to-earnings multiple.

In the context of current growth, that multiple doesn’t seem that expensive. For the full year, EPS should grow in the range of 28% year-over-year.

But apparel customers can be fickle. It only takes one fashion misstep to ding sales and pressure margins. A gradual return to the office could boost business professional and business casual options at the expense of Lululemon’s “athleisure” offering. Even Wall Street doesn’t seem that excited: the average price target of $381 only suggests about 11% upside over the next 12 months, and analysts usually are overly optimistic.

Certainly, a market-driven sell-off would create a more attractive price and a more attractive bull case. But even here, it’s difficult to argue too forcefully against the stock. The long-term performance and the dominance versus competitors both suggest Lululemon has years of growth ahead. Strong performance in men’s apparel expands the company’s market.

The clear comparison at this point is Nike (NYSE:NKE), another stock that historically has looked too expensive. Even with a sharp pullback, NKE has been one of the best stocks of the century, gaining more than 1,600%.

Lululemon has similar potential: to both dominate and expand its category, maintaining impressive profit margins all the while. Lululemon currently has a market capitalization of $43 billion; Nike’s is almost four times as high.

And so as long as Lululemon continues to execute like this, LULU stock can keep rallying.

Disclaimer: As of writing, Vince Martin has no positions in any securities mentioned.

Lululemon Should Be On Your Shopping List
 

Related Articles

Lululemon Should Be On Your Shopping List

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email