Is Lululemon Stock Overvalued?

Lululemon Athletica Inc (NASDAQ:LULU) is an iconic athleisure brand that made yoga pants (aka leggings) a staple of nearly every woman’s wardrobe.

The company’s comfortable yet functional clothing landed it in the perfect place for those looking to escape the effects of the coronavirus pandemic.

Global stay-at-home orders shut down a lot of retail, but Lululemon’s ecommerce overcame obstacles of its brick-and-mortar footprint. This caused a bull rush on the stock that drove prices almost consistently up during the pandemic, but is Lululemon stock overvalued?

The holiday season of 2020 is like no other, as social distancing guidelines have retailers pushing back on Black Friday sales that leaked into Thanksgiving in the 2010s.

CEO Calvin McDonald has high hopes for the company to continue its growth, despite trading at a historic high market cap over $40 billion.

If the company can justify these prices with solid earnings and a roadmap to get through the pending market recession, it could provide a better upside than competitor Nike Inc (NYSE:NKE), which has a market cap over $160 billion.

Expansion into international markets, along with supporting ecommerce growth are the two keys to Lululemon’s continued success. So what does Lulu have up its sleeves?

Why Lululemon Stock Went Up

While the rest of the retail industry struggled, Lululemon leaned on its ecommerce sales, which gained 157 percent year over year in the wake of the coronavirus pandemic.

This accounted for 61 percent of the business’s total revenue and dropped grow margins by 54.2 percent. The company didn’t need to discount anything, as customers happily flocked to its full-priced merchandise. And because these digital sales have higher margins, the company easily outpaced earnings estimates.

The company responded to the pandemic by cutting executive pay by 20 percent for three months while the board of directors hit pause on its stipend payments.

By late September, the company resumed its stock buyback programs, which happened during a dip in the stock’s market cap.

This signaled to bulls that it may be time to consider Lululemon a long-term investment play. Here’s an overview of the company’s financial reports in the first half of 2020 to understand why that is.

Stellar Lululemon Financials Keep Investors Happy

Lululemon crushed analyst expectations in 2020, reporting $902.9 million in revenue versus $842.5 million expected.

This gave the company adjusted earnings per share of $0.74 and represents a 2 percent increase from its $883.4 million revenue from the same quarter in 2019.

The company reported 97 percent of stores reopened by the end of the quarter on August 2nd and only sales were up 157 percent year over year.

This helped Lululemon’s sluggish brick-and-mortar sales, which dropped 51 percent from the prior year’s quarter to $287.2.

The company entered the back half of 2020 with $523 million in cash and cash equivalents, along with a healthy 54.2 percent margin.

It also announced a $500 million acquisition of Mirror in June. This home fitness startup sells a $1500 smart mirror that also has a paid premium subscription service featuring a stream of customized at-home workout routines from fitness trainers across a variety of disciplines.

It expects this recurring revenue to help fuel further development into the connected fitness industry.

However, Lulu’s $40 billion market cap has some analysts wondering if its bubble will burst like its pants did during a 2013 debacle that stalled the company’s growth for five years after.

Is Lululemon Valuation Too High?

Lululemon’s stock price dropped to $128.84 at the onset of the coronavirus pandemic as municipal lockdown orders were issued and non-essential retailers were closed. It quickly rebounded to a peak just shy of $400 before dropping back down to the $300 range.

Heading into the election, the stock is trading just above $320 per share, and while this represents a hefty valuation, the company feels like it can justify it with its expansion plans and the surge in ecommerce.

Bearish investors disagree, pointing to the company trading at over 12x its 2019 annual revenue of $3.29 billion.

Although the company is growing, this multiplier could be too rich for some growth investors who feel a coming recession could cause the company to shrink.

It faces competition from the likes of embattled social pyramid startup Lularoe, and even Kohl’s (NYSE:KSS), which announced a new private-label athleisure brand called FLX to debut March 2021.

However, it already took a few hits in 2020, and it still outperformed the general market and much of the competition. This has some analysts wondering if it’ll drop in price.

Will Lululemon Stock Drop?

Lululemon’s biggest competition at this point is itself. It has big pants to fill, and it needs to show positive revenue growth throughout the holiday season to continue its hot streak.

It has a great chance at it too, considering it already proved its mettle during the pandemic, and the growing need for at-home workout gear, along with its new subscription revenues, should keep investors satiated at least through the end of the year.

By that point, its future – like much of the market – is dependent on how fast the economy recovers once all government stimulus packages expire.

Foreclosure and eviction moratoriums through the end of 2020 make it difficult to know where everyone truly stands.

If the economy drops into a major recession (or even a depression), Lululemon may find itself cutting its margins down to make up for lost revenues. Other than that, it should have no problem executing on its current road map.

Is Lululemon Stock Overvalued? The Bottom Line

Lululemon is a beloved athleisure brand that specializes in yoga and home workouts. Its fashionable and functional clothes experienced a surge in sales as the public prepared to stay healthy while spending more time at home.

It used this extra revenue to purchase health tech startup Mirror, which it expects to bring in recurring subscription revenue while growing its ecommerce and connected fitness businesses.

The economy may stumble, but Lululemon has proven it can recover. The only question is how much juice is left to squeeze for those buying in at high prices in the fourth quarter.

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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.