Is Lululemon Stock Overpriced?

Athletic apparel company Lululemon (NASDAQ:LULU) has become very popular with both consumers and investors in recent years. The brand’s success and rapid growth have created vigorous excitement among shareholders. Today, though, it may be trading at a premium to its intrinsic value, so is Lululemon stock overpriced?

Is Lululemon Making Money?

Lululemon is a profitable company, though earnings retreated somewhat in 2022.

For the full year, earnings per share fell to $6.68. In 2021, each share generated $7.49 in earnings. Much of this effect was the result of rising costs that impacted the company’s operating margin. Total operating margin fell from 21.3 percent in 2021 to 16.4 percent in 2022.

Despite cost pressures that weighed on earnings, Lululemon generated impressive revenue growth last year. Net revenue rose 30 percent in 2022, while comparable sales rose 25 percent. The company also saw continued success from its direct-to-consumer sales channel, which accounted for 46 percent of net revenues.

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Lulu has consistently beaten analysts’ earnings expectations. To-date, it has beaten consensus earnings estimates for 11 consecutive quarters. While this is no guarantee that the company will continue this impressive performance in the future, it does point to strong execution and cost control measures by the current management team.

In the next 12 months, Lululemon is expected to see its earnings grow by about 16 percent. Growth is projected to continue at roughly this pace for the next 3-5 years. Management does, however, expect revenue growth to slow to 18 percent in 2023.

Is Lululemon Stock Overpriced?

Several factors suggest that Lululemon is at least somewhat overpriced. To begin with, the stock trades at more than 32 times earnings and 29 times cash flow. Lulu would have to deliver very rapid growth over the next several years to justify those multiples.

The stock’s price-to-earnings-growth ratio (PEG) is 1.64, indicating that it is priced at somewhat of a premium to its forecasted future earnings.

Is Lululemon Stock Risky?

Management foresees slower revenue growth in 2023. This, along with sustained inflation, could cause earnings to grow at a slower pace than previously expected. If this occurs, investors could see their shares sell off as enthusiasm for Lululemon temporarily wanes.

Although it’s unlikely that the company will plateau permanently, such developments could increase the short-term risks of the stock.

Another problem for Lululemon could come in expanding its appeal to a wider consumer base. Management is focused on growing the men’s apparel business line but may be unable to achieve its goals in this area. Failures to expand the brand’s reach is likely to hurt growth forecasts and lower earnings.

A further headwind comes from steep competition in the apparel industry. The recent meteoric rise of Chinese clothing manufacturer SHEIN is a standout illustration of these pressures.

Founded in 2008, the company rapidly overtook much more established clothing brands thanks to a combination of aggressive social media marketing and well-coordinated logistics.

What Is the Price Prediction for Lululemon Stock?

This year, analysts forecast Lulu could rise to as high as $414, resulting in a potential upside of 9.6 percent versus the current price.

The range of price forecasts is wide. At the lower end, analysts peg $225 as fair value. That would imply Lulu could lose 40 percent of its value, while the highest target of $500 would see it gain 32 percent.

Higher prices could amplify concerns around Lululemon’s valuation. With the stock already slightly overpriced, it could become weaken the value proposition if its price advances without higher-than-expected growth. This phenomenon has already occurred to some degree since the stock has gained nearly 18 percent in the first few months of 2023.

Is Lululemon Stock Worth Buying?

One of the most compelling arguments in favor of the stock is management’s ability to produce consistently high margins. Gross margins are consistently in the 55-58% range.

The company’s return on equity stands at nearly 45 percent, while its net margin is 10.5 percent. For comparison, the clothing giant Abercrombie & Fitch currently generates ROE and net margin of 1.9 percent and 0.08 percent, respectively.

Another advantage Lululemon has is its lack of long-term debt and large cash reserve. The company currently holds over $1.15 billion worth of cash on hand, providing it ample funding for future growth. Lulu’s avoidance of debt is also likely to give it an advantage in today’s interest rate environment.

On the downside, the luxury apparel manufacturer will have to grow at an aggressive rate over the next several years to justify its current valuation. Slower growth caused by competitive pressures, reduced consumer spending and/or higher costs could trigger the market to reprice Lululemon at a lower multiple to its earnings.

A challenge for the firm is it operates in an industry where establishing competitive moats is virtually impossible. Thanks to the rise of fast fashion, consumers often jump from one brand to the next in rapid succession. This problem isn’t unique to Lululemon, but investors should take it into account before buying stock in any fashion brand.

Ultimately, Lululemon is a stock that seems likely to deliver decent returns without substantially beating the market in the medium term. Yes, it has a strong growth thesis, good profitability metrics and a solid financial base. It is likely a good choice for investors hunting for for a proven apparel manufacturer that could deliver steady growth. Despite being somewhat overpriced, the growth Lululemon could generate over time may make it an acceptable buy today.

Who Owns the Most Lululemon Stock?

Institutional investors currently own over 90 percent of Lululemon. The largest single shareholder is FMR, LLC, better known as Fidelity Investments. Fidelity currently owns 18,359,741 shares of Lululemon. This stake is valued at over $6.9 billion at today’s prices.

The next-largest shareholder is Vanguard, followed by Blackrock. Together, these three large institutions control well over 30 million shares in the company.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.