Lululemon’s Stock Down 34% YTD, What’s Happening?

After a 34% decline so far this year, at the current price of around $336 per share, we believe Lululemon (NASDAQ: LULU), a company designing and selling athletic and casual apparel – could likely bounce back in the longer term. LULU saw a stellar performance in FY 2023 (ended Jan. 28). The company’s revenue increased 19% year-over-year (y-o-y) in fiscal 2023 to $9.6 billion, with comparable sales up 13%. The company’s gross margin jumped to 58% in FY’23 from 55% in FY’22, and the operating profit margin soared to 22% from 16% in FY’22. Consequently, its adjusted earnings per share (EPS) also increased from $10.07 in 2022 to $12.77 in 2023. Despite this impressive performance, the company’s stock is significantly down this year due to lower-than-expected Q1 2024 guidance. For FQ1, management guided for a y-o-y revenue growth of 9% to 10%, and adjusted EPS growth of 3% to 5%. In comparison, LULU saw a 24% y-o-y growth in revenues and a 54% y-o-y increase in profitability last year in Q1 2023. The softness in the U.S. market and planned increased spending to grow brand awareness have resulted in a weaker outlook. However, it was pointed out that the retailer’s profitability will decline along with that slowing sales performance before rebounding over the next several quarters and for the full 2024 year. The company’s management is still guiding for double-digit growth for the full year between 11- 12%, and the bottom line is to grow 10% to 11% y-o-y. Current operating conditions aren’t very favorable, and the guidance reflects only that rather than its actual performance.

Lululemon’s P/E ratio grew from about 42x at the end of FY 2021 to 47x at the end of FY 2022. While the ratio declined to around 40x at the end of FY 2023, the company’s current 28x levels, remain 30% lower than the levels of FY 2023. That said, LULU stock is trading at a discount – compared to historical averages, but similar to Nike (~ P/E of 27x). That said, LULU’s operating margins are unmatched by its competitors, including Nike and On Holding. Lululemon has barely scratched the surface of its men’s category, which has been a major booster for sales. The international business (which accounts for only 21% of its business) is also underpenetrated and has a particularly long runway for growth.

LULU stock has seen little change, moving slightly from levels of $350 in early January 2021 to around $336 now, vs. an increase of about 35% for the S&P 500 over this roughly 3-year period. Overall, the performance of LULU stock with respect to the index has been lackluster. 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?

We forecast Lululemon’s Revenues to be $10.8 billion for the fiscal year 2024, up 12% y-o-y. Looking at the bottom line, we now forecast the earnings per share to come in at $14.09. Given the changes to our revenues and EPS forecast, we have revised our Lululemon Valuation to $432 per share, based on a $14.09 expected EPS and a 30.6x P/E multiple for the fiscal year 2024 – almost 29% higher 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.

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