This athletic wear company beat analysts’ earnings estimates by $0.46 last quarter, and 26 analysts have recently boosted the company’s EPS forecasts.
Lululemon Athletica Inc. (LULU)
From Argus Weekly Staff Report
Founded in 1998, Lululemon Athletica is based in Vancouver, Canada, though it is incorporated in Delaware and its financial results are reported in U.S. dollars. The company designs and sells athletic apparel, and markets its yoga-inspired clothing under the lululemon athletica and ivivva athletica brand names. It also sells fitness pants, shorts, tops, and jackets designed for running and other sports.
Lululemon has a strong brand and growing direct-to-consumer sales, which we expect will lead to higher margins over the next several years. In addition, we expect revenue growth from the expansion of the company’s men’s clothing line. With relatively few stores outside North America, the company also has substantial opportunities for international expansion, particularly in China. In all, we believe that the company’s prospects are among the best in the apparel sector.
The company reported fiscal 2Q22 adjusted EPS of $1.65, up from $0.74 a year earlier and above the consensus forecast of $1.18. Net revenue of $1.45 billion rose 61% on a reported basis and 56% in constant currency. The company’s adjusted 2Q operating margin was 20.6%, up from 15.0% in the prior-year quarter and 470 basis points above consensus.
We are raising our FY22 EPS estimate to $7.50 from $6.80 and our FY23 estimate to $9.40 from $8.50. Our five-year compound annual EPS growth rate forecast is 15%. We believe that Lululemon has strong growth prospects on the other side of the pandemic, helped by its men’s clothing line and international expansion. At the same time, the company’s leadership in athletic apparel is being challenged as competitors seek new, lower-priced distribution channels (as Under Armour did in choosing to sell merchandise through Kohl’s).
We think that LULU shares are attractively valued at recent prices near $423. The shares have traded in a range of $129-$433 over the past year and are currently near the top of that range. On a technical basis, the shares have been in a bullish pattern of higher highs and higher lows that dates to May 2017.
On the fundamentals, LULU shares are trading at 45-times our revised FY23 EPS estimate, above the five-year average of 40. We believe that they deserve to trade at higher multiples given the company’s increasing comp sales, strong brands, and prospects for continued growth. Our revised price target of $500 implies a multiple of 53-times our FY23 estimate.
Jim Kelleher, CFA, Argus Weekly Staff Report, argusresearch.com, 212-425-7500, September 16, 2021