Will Lululemon Stock Go Up?

Will Lululemon Benefit From Reopening Boom? A recent Jefferies consumer spending survey found that 23% of US participants named clothing and accessories as their main priority purchase preference once the pandemic-hit economy fully opens again, second only to restaurants and bars.

As a consequence of increased spending, analysts expect apparel stocks to thrive, as more and more people return to work and start engaging in social gatherings again. Thoughts will turn once more to fashion and wardrobe matters – with the dress down trend of the pandemic fading into memory.

What’s Happening With Lululemon Stock?

A change in spending habits is good news for Lululemon, as the clothing brand recently saw its share price fall roughly 20% from record highs in 2020 of $399.90.

The drop-off from the price peak shouldn’t worry investors too much though, since 2020 was a great year overall for Lululemon, seeing its stock price soar by 175% from March lows at the beginning of the COVID-19 crisis.

Lululemon also makes most of its revenue from in-person sales, so the return of customer footfall to its brick-and-mortar stores will be an enormous benefit.

The company’s latest quarterly figures should give shareholders ample optimism as well. The firm beat revenue estimates by $70 million, growing to $1.73 billion which represented a 23.6% year-on-year improvement. Non-GAAP EPS also outperformed analyst expectations, coming in at $2.58, which was up by $0.09 on prior Wall Street predictions.

Sales increased during the quarter by 21%, although comparable store productivity was down 28%. However, overall profit grew to $1 billion, as did its gross margin which was up 60 basis points at 58%.

Is Lululemon A Good Stock to Buy Now?

Despite good quarterly results, the market didn’t seem too impressed and instead had a rather subdued response to the latest earnings figures.

Company guidance for the rest of 2021 sees an EPS target much lower than analysts’ current expectations, and the forecast growth of 40% this year might not be in reach.

However, this lukewarm reaction to what was otherwise a great quarter might open up a buying opportunity for the savvy investor. Lululemon’s forward revenue growth of 18.52% is way above the sector median of 5.55%, and an annual gross profit of $2.5 billion during fiscal 2020 shows the company fared well against pandemic headwinds, generating $4 billion of total revenue in a very tricky environment.

Furthermore, Lululemon is growing its operations globally and expanding its online direct-to-consumer business too. Its international revenue was up 47%, and the firm opened up 6 new net shop taking its total to 521 stores.

Is Lululemon Stock A Hold?

Value investors might pause for thought when it comes to buying Lululemon, as there’s more to the company’s financial story than first meets the eye.

Yes, revenue growth is rising nicely, and the firm has almost no debt – and what little it does have is easily covered by its cash and cash equivalents. For a company such as Lululemon, which is still growing rapidly, this kind of situation is almost unheard of and without doubt a pleasing situation to be in.

However, Lululemon’s forward P/E is a massive 51x, which, for a company outside of the tech-world, is just far too high. Given that Lululemon is a sports apparel company, it’s difficult to justify a metric like this.

But it doesn’t stop there. Its price-to-sales ratio of 9.77 is fairly hefty too, which, compared to the wider sector’s 1.67, is asking for a very large premium.

As for net margins, Lululemon also underwhelms. With a P/E ratio such as it has, a margin of at least north of 30% would be expected. But, Lululemon doesn’t come anywhere near this; it struggles to keep net margins above even just 15%.

For a like-to-like comparison, Nike (NKE), one of Lululemon’s chief competitors in the space, trades at a forward P/E of 43.88 and a Price-to-sales of 5.61. Some consider Nike’s opportunity for growth to be higher than Lululemon’s given the brand’s enormous recognition and presence in the market, making it even harder to defend Lululemon’s metrics still.

And if Nike were Lululemon’s only rival in the sports apparel market things would be difficult, but that’s not the case.

The sports clothing industry is notoriously competitive, and any firm operating in it has to battle both on the national and international stage – and against such established names as Adidas, Under Armour (UA) and Reebok, and newer players like Sweaty Betty and Gymshark.

The expected CAGR for the sector as a whole is estimated to be around 5.1%, suggesting that if Lululemon is expecting to hit its own growth figures, it will have to take a sizeable chunk of business from these competitors – a tough ask, without doubt.

Is LULU Stock Overpriced?

Lululemon has made an audacious gamble on its own success by aggressively expanding its brick-and-mortar stores at a time when most other apparel retailers are seeking strategically to maximize their online revenue streams.

This is certainly risky; indeed, pretty much every clothing brand can count online sales as their highest growth driver over the last year – Lululemon itself saw a digital growth of 94% on the previous 12 months.

But the plan could work. It seems that shoppers are looking for the real-world store experience again – especially post-pandemic – and the idea behind expanding physical stores could pay-off with an influx of new customers and stronger brand loyalty.

And given the firm’s good fundamentals, and an innovative growth strategy, Lululemon could be a solid long-term stock investment for those seeking a different kind of apparel play.

From a discounted cash flow perspective, LULU share price has upside potential to $379 per share. That represents double digit percentage increase opportunity for investors who side with management on the future projections for the company as a whole, and its prospects for taking market share from competitors.

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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.