Lululemon Stock Up 52% In Past Year. What Should You Expect Now?

After a 52% increase in the last twelve months (LTM), at the current price of around $496 per share, we believe Lululemon (NASDAQ: LULU), a company designing and selling athletic and casual apparel – could see a modest loss in the near term. LULU saw a stellar performance in FY 2023 and its stock has increased from around $326 to $496 over the LTM, outperforming the broader indices, with the S&P growing 23% over the same period. The company’s revenue for the first three quarters of fiscal 2023 (ended Oct. 29) was up 20.1% year-over-year (y-o-y) to $6.4 billion while operating income improved by 20% y-o-y to $1.2 billion. In addition, its net income also grew 20% to $881 million. Moreover, the company’s free cash flow reversed its free cash outflow from the prior year, coming in at $467 million. Despite this impressive performance, we believe that LULU stock looks overvalued. Lululemon’s P/E ratio grew from about 42x at the end of FY 2021 to 47x at the end of FY 2022. The company’s P/E multiple is yet to see a meaningful decline from the current 63x levels, which remains 34% higher than the levels of FY 2022. That said, LULU stock is trading at a premium – compared to both historical averages and industry peers (Nike ~ P/E of 30x).

LULU stock has seen extremely strong gains of 40% from levels of $350 in early January 2021 to around 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 60% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – 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 the fiscal third quarter, Lululemon’s revenue climbed 19% y-o-y to $2.2 billion (while competitors like Adidas and Puma experienced declines). The company also opened 14 net new stores and reported a total comparable-store sales increase of 13% in the third quarter – with retail store comps growing 9% and direct-to-consumer revenue gaining 18% from year-ago levels. Also, the retailer’s adjusted earnings jumped 27% y-o-y to $2.53 per share. We forecast Lululemon’s Revenues to be $9.6 billion for the fiscal year 2023, up 18% y-o-y. Looking at the bottom line, we now forecast the earnings per share to come in at $10.96. Given the changes to our revenues and EPS forecast, we have revised our Lululemon Valuation to $446 per share, based on a $10.96 expected EPS and a 40.7x P/E multiple for the fiscal year 2023 – almost 10% lower than the current market price.

In September, Lululemon announced a five-year partnership with fitness content and equipment provider Peloton, which will market Lululemon’s athletic apparel in its stores. Additionally, management has communicated a five-year strategic plan called “Power of Three x2.” The plan includes doubling its FY 2021 revenue to $12.5 billion by 2026. The plan follows up on its original “Power of Three” strategy unveiled in April 2019 to increase digital revenue and accelerate growth. That said, LULU’s growth opportunities lie in international expansion (as International business contributes only 16% of total revenues currently) and the men’s apparel segment.

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.

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