Down 9% This Year, What’s Next For Lululemon’s Stock Past Q4 Results?

[Note: Lululemon’s FY’23 ended January 2024]

Lululemon (NASDAQ: LULU), a company designing and selling athletic and casual apparel, is scheduled to report its fiscal fourth-quarter results on Thursday, March 21. We expect LULU stock to likely see little to no movement with revenues and earnings matching market expectations. 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. The company’s free cash flow reached $467 million, reversing its prior year’s cash outflow. 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 59x levels. 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 shown strong gains of 35% from levels of $350 in early January 2021 to around $465 now, vs. a similar change 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 TM, 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?

Our forecast indicates that Lululemon’s valuation is $446 per share, which is almost in line with the current market price. Look at our interactive dashboard analysis on Lululemon’s Earnings Preview: What To Expect in Fiscal Q4? for more details.

(1) Revenues expected to be in line with consensus estimates

Trefis estimates Lululemon’s Q4 2023 revenues to be around $3.2 Bil, matching the consensus estimate. 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. For the full year, we forecast Lululemon’s Revenues to be $9.6 billion for the fiscal year 2023, up 18% y-o-y.

In September 2023, 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 the International business contributes only 16% of total revenues currently) and the men’s apparel segment.

2) EPS likely to match consensus estimates

Lululemon’s Q4 2023 earnings per share (EPS) is expected to come in at $5.00 per Trefis analysis, in line with the consensus estimate. In Q3 2023, the retailer’s adjusted earnings jumped 27% y-o-y to $2.53 per share.

(3) Stock price estimate in line with the current market price

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 only 4% lower than the current market price.

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.