What’s Next For Lululemon Stock After 38% Fall This Year?

After a 38% decline so far this year, at the current price of around $323 per share, we believe Lululemon (NASDAQ: LULU), a company designing and selling athletic and casual apparel – could likely bounce back in the longer term. In comparison, LULU’s peer Nike’s stock (NYSE: NKE) is down 11% since the beginning of this year. LULU saw a stellar performance in FY 2023, which ended Jan. 28. The athleisure brand experienced a brutal downturn this year after enjoying a mostly upward trajectory in its stock price in 2023. The main factors for the weakness in the stock can be attributed to the departure of its Chief Product Officer, change in consumer spending trends, and growing competitors. However, the company beat the top and bottom line estimates in the recent Q1. The clothing company earned a profit of $2.54 per share in Q1, up from $2.28 in the same quarter last year and 12 cents above expectations. The increased profit came on an 11% gain in revenue to $2.2 billion which was slightly above estimates.

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 25x levels, remain 345% lower than the levels of FY 2023. That said, LULU stock is trading at a discount – compared to historical averages, and its arch-rival Nike (~ P/E of 28x). That said, LULU’s operating margins of ~20% are unmatched by its competitors, including Nike and On Holding. Lululemon has barely even scratched the surface of its men’s category, which has been a major boost for sales. The international business (which accounts for only 21% of its business) is also under-penetrated 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 $320 now, vs. an increase of about 40% 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?

In Q1, Lululemon’s comparable sales were up 7% on a constant currency basis, just shy of 7.8% estimates. While its sales were flat year-over-year (y-o-y) in North America, international sales shot up by 25% y-o-y on strength in China. Gross margin expanded to 57.7% from 57.5% and operating margin contracted slightly to 19.6% from 20.1%, beating expectations of 57.4% and 18.9%, respectively. The results indicate that Lululemon continues to dominate the yogawear market despite shifting consumer tastes.

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 $14.13. Given the changes to our revenues and EPS forecast, we have revised our Lululemon Valuation to $380 per share, based on a $14.13 expected EPS and a 26.9x P/E multiple for the fiscal year 2024 – almost 20% higher than the current market price.

Looking ahead to the second quarter, Lululemon expects net revenue in the range of $2.40 billion to $2.42 billion vs. consensus of $2.45 billion, representing growth of 9% to 10% y-o-y. It also expects a profit of $2.92 to $2.97 per share, vs. consensus of $3.03 for the quarter. For 2024, the company’s revenue is reaffirmed at $10.7 billion to $10.8 billion, representing growth of 11% to 12%. Full-year diluted earnings per share are now expected to range from $14.27 to $14.47, up 10% to 11% y-o-y. Additionally, the company authorized a $1 billion increase in its stock repurchase program. It also expects operating margin for the year to be approximately 23.3%.

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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