lululemon athletica inc. LULU has maintained a robust growth trajectory (which reflects momentum across its international markets and Canada), a strong men’s category, and better long-term growth potential compared with other lifestyle retailers.
However, the company’s current forward 12-month price-to-earnings (P/E) multiple of 26.14X raises concerns about whether the stock's valuation is justified. This multiple is significantly higher than the Zacks Textile - Apparel industry average of 14.72X, making the stock appear relatively expensive.
The price-to-sales (P/S) ratio of lululemon is 4.24X, above the industry’s 2.29X. This adds to investor unease, especially considering its Value Score of D, which suggests it may not be a strong value proposition at current levels.
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LULU Stock's Premium Valuation Surpasses Peers
At 26.14X P/E, lululemon trades at a significant premium to its industry peers. The company’s peers, such as Under Armour UAA, GIII Apparel Group GIII and Ralph Lauren RL, are delivering solid growth and trade at more reasonable multiples. UAA, GIII and RL have forward 12-month P/E ratios of 24.08X, 7.65X and 19.1X — all significantly lower than LULU. At such levels, lululemon’s valuation seems out of step with its growth trajectory.
LULU stock’s premium valuation suggests that investors have strong expectations for its growth. However, the stock currently seems somewhat overvalued. lululemon’s ability to meet or exceed these lofty expectations is crucial to justifying its premium pricing.
The company’s success in its Power of Three X2 growth plan, which promises a total net revenue CAGR of 15% for 2021-2026, is crucial. Strong business momentum in its international markets, an expanded men’s category, and accelerated e-commerce investments should fetch the company laurels. While success in these areas could strengthen its market leadership, failure could pose serious challenges for this yoga apparel retailer.
In the past three months, LULU shares have rallied 43.6%, outperforming the broader industry’s growth of 17.6% and the Consumer Discretionary sector’s rise of 6.9%. The company also outperformed the S&P 500’s rally of 3.2% in the same period.
LULU Stock 3-Month Return
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lululemon’s current share price of $392.92 reflects a 20% discount from its recent 52-week high mark of $491.30. Also, the stock reflects a 73.9% premium from its 52-week low of $226.01.
LULU trades below its 50 and 200-day moving averages, indicating a bearish sentiment. The moving average is an important indicator for gauging market trends and momentum.
LULU Stock Trades Below 50-Day & 200-Day Moving Averages
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Challenges Faced by lululemon
One of the key hurdles in lululemon’s path is the slowdown in its women's business, driven by a product strategy that offered fewer updates to core and seasonal styles, such as changes in colors, prints, patterns and silhouettes. This lack of newness, resulting from earlier product decisions, left female customers with fewer fresh options, negatively impacting conversion rates. The decline was most evident in the bottoms category and online sales.
Management highlighted a strong innovation pipeline to address these issues in the long term. However, the near-term performance is expected to reflect the effects of limited updates to women’s assortments.
lululemon’s Americas business has faced pressure from inflation and higher interest rates, leading to reduced discretionary spending. This has particularly impacted luxury retail brands like lululemon in the United States, where revenue growth slowed in the third quarter of fiscal 2024.
LULU reported a 2% increase in sales in the Americas in the fiscal third quarter, driven by growth in Canada. However, comparable sales in the region declined 2%, with U.S. sales remaining flat year over year, which is consistent with the prior quarter. While the company is making progress in improving its U.S. performance, it anticipates a full recovery by the first quarter of fiscal 2025. Our model predicts revenues in the United States to increase 0.3% year over year for fiscal 2024.
LULU Earnings Estimates Portray Strength
lululemon’s estimates have shown an uptrend in the past 30 days. The Zacks Consensus Estimate for LULU’s fiscal 2024 and 2025 earnings per share rose 0.3% each in the last 30 days. The upward revision in earnings estimates indicates that analysts have faith in the company’s growth potential.
For fiscal 2024, the Zacks Consensus Estimate for LULU’s sales and EPS implies 10% and 11% year-over-year growth, respectively. The consensus mark for fiscal 2025 sales and earnings indicates 7.4% and 6.7% year-over-year growth, respectively.
Find the latest EPS estimates and surprises on Zacks Earnings Calendar.
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Analyzing LULU’s Core Strengths & Long-Term Growth Potential
Despite its troubles in the Americas and women’s businesses, lululemon’s long-term prospects are intact, supported by its Power of Three X2 strategy. This five-year plan focuses on three key growth drivers — product innovation, guest experience and market expansion. The strategy aims to quadruple international net revenues from the 2021 reported levels, and double digital and menswear sales.
The company expects to see low-double-digit compound annual growth rates (CAGR) for its women’s business and North America operations, with mid-teens growth in the store channel over the next five years. Expansion plans include entering new markets in China and Europe, with store openings planned in Spain and Italy.
As part of the Power of Three X2 strategy, lululemon projects net revenues of $12.5 billion by 2026, doubling the $6.25 billion reported in 2021. This suggests witnessing a 15% total net revenue CAGR for 2021-2026, accompanied by a slight annual expansion in the operating margin.
Looking at the upcoming quarter, lululemon is encouraged by a strong start to the holiday season and remains focused on accelerating its U.S. business while expanding global brand awareness. The company is optimistic about its fourth-quarter fiscal 2024 performance, and has raised its revenue and EPS guidance for the year.
For the fourth quarter of fiscal 2024, lululemon projects net revenues of $3.475-$3.51 billion, suggesting 8-10% year-over-year growth and 3-4% growth excluding the 53rd week. Expected EPS for the quarter is $5.56-$5.64, up from the adjusted EPS of $5.29 reported in the prior-year period. Our model forecasts year-over-year revenue growth of 9.5% and an adjusted EPS of $5.59 for the quarter.
For fiscal 2024, the company expects net revenues of $10.452-$10.487 billion, indicating 9% year-over-year growth and a 7% rise excluding the 53rd week. This marks an increase from its previous guidance of $10.375-$10.475 billion, which suggested 8-9% growth. The gross margin is projected to improve 10-20 basis points year over year compared with the earlier mentioned 20-bps decline, implying relatively flat markdowns from the prior year.
Lululemon anticipates fiscal 2024 EPS to be $14.08-$14.16, suggesting a rise from the $12.77 reported in fiscal 2023 and higher than its earlier forecast of $13.95-$14.15. We project fiscal 2024 revenue growth of 9% and an EPS of $14.15.
Is Now the Right Time to Buy LULU Stock?
lululemon’s premium valuation and persistent troubles in the Americas and women’s businesses raise concerns for investors. Though the company's sales performance in the Americas is somewhat disappointing, LULU holds strong long-term potential, evident from the momentum in international markets and Canada, and strength in the men’s category. The stock’s overvalued stature can be linked to the company's long-term growth potential, supported by its Power of Three X2 strategy, financial resilience and operational acumen.
Holding on to lululemon stock is a prudent strategy at the moment. While LULU remains an attractive investment for long-term investors, its efforts to combat the challenging landscape will be crucial. Prospective investors may need to carefully evaluate the current valuation, but for existing shareholders, retaining this Zacks Rank #3 (Hold) stock in their portfolios will be a wise decision. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
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