What's Next for Lululemon?

Lululemon's stock surges as it strolls past earnings

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Jun 02, 2023
  • Lululemon has shocked the market by revealing a thrilling first-quarter earnings report.
  • The company's product margins and bottom-line earnings have improved significantly.
  • Salient valuation multiples indicate that Lululemon's stock hosts high expected returns.
  • A technical analysis of Lululemon's stock signals that a possible momentum anomaly is in the cards.
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Lululemon released its first-quarter earnings report after the market closed on Thursday and revealed a comprehensive beat, sending its stock soaring in Friday's morning trading session.


Based on the company's latest earnings release, it achieved quarterly revenue of $2 billion, which is a 24.2% increase since 2022's first quarter. In addition, Lululemon strolled past its bottom-line target, achieving a quarterly earnings per share figure of $2.28 and beating analysts' estimates by 28 cents.

One of the key drivers in Lululemon's stellar first quarter was its comparable sales growth, which amounted to 17% year over year on a dollar-neutral basis. The company's continued growth in comparable sales shows that its investment thesis is objective, as the figure illustrates astute capital allocation. Moreover, solid comparable sales growth numbers usually convey that a company is administering shareholders' capital with efficiency.

Furthermore, Lululemon's direct-to-consumer (DTC) sales now span 42% of its revenue mix. The DTC approach allows it to cut costs and improve customer targeting. The question, is, will Lululemon's DTC approach result in better company-wide profitability? Only time will tell; however, the signs are certainly positive in my opinion.

Despite Lululemon's prolific quarter, the question remains: Will the company and its stock continue to succeed in the coming quarters, or will the turbulent macroeconomic environment prevail?


Financial statement analysis

As mentioned above, Lululemon experienced a significant top-line increase during its first quarter. However, even more impressively, the company expanded its profit margins at a time when inflation hurt most of its competitors, indicating not only strong demand but also good cost management.

According to Lululemon's footnotes, the company improved its product profit margins by 420 basis points within the space of three months due to lower freight costs and suppressed fuel prices. Fortunately, Lululemon's robust brand strength allowed it to bypass tactics like significant sales discounts or promotions, permitting it to sustain its core growth. Furthermore, the company's operating profit margin widened by a net 4% in the quarter, primarily because of lower supply chain costs and foreign exchange revaluations.

We are seeing strong results from Lululemon's expansion efforts. Previously, its capital expenditures increased by approximately $35.5 million for its third quarter of the last fiscal year as the company invested aggressively in new locations, technological updates and renovations.

A parsimonious look at Lululemon's balance sheet shows the company is in excellent financial condition, especially for a company still within its growth phase. According to GuruFocus' databank, Lululemon has a cash-to-debt ratio of 1.06 and an equity-to-asset ratio of 0.56, conveying its ability to fund further expansion while providing its shareholders with residual value.


Lastly, the company's return on common equity of 29.57% suggests that Lululemon is growing rapidly. To measure a company's growth, analysts often compare its ROE to nominal Gross Dometic Product Growth, and evidence shows that Lululemon is outpacing the global economy by a significant amount.

Valuation and technical analysis

Unlike mature stocks, growth stocks such as Lululemon are best valued by observing factors like earnings yield, free cash flow growth and price-sales ratios in my opinion. The reason for this view is that growth stocks emphasize scale over residual value to improve their market shares; therefore, they usually exhibit high price multiples.

Lululemon's earnings yield of 4.07% is average at best, as it is ranked within the 44th industry percentile. However, the company's forward rate of return is primed at 21.36%, which ranks better than 68.68% of its peers. The latter arguably carries more weight as it measures a company's free cash flow growth on a nominal basis.


Furthermore, a technical analysis shows that the stock has garnered momentum as it is trading above its short and long-term moving averages. The "momentum anomaly" is an underestimated indicator in my opinion that could result in sustained success for Lululemon's stock.


Noteworthy risks

The macro economy is in an uncertain spot, as conveyed by the inverted yield curve. Thus, higher risk premiums must be considered before investing in consumer goods growth companies like Lululemon.

Another point of consideration is Lululemon's high beta coefficient of 1.4. The reason why the stock's beta presents a risk is that high-beta stocks tend to lose a significant amount of value when abrupt market dips occur. Abrupt dips have been a common theme over the past year, which was to be expected in an uncertain interest rate environmen.

Final word

Based on qualitative variables, quantitative factors and the company's latest earnings beat, I believe it is highly probable that Lululemon's stock will resume its bullish trend into the latter part of 2023.

The company has a robust market position, and its profit margins are increasing amid lower transport costs. Moreover, Lulumemon's balance sheet is well-managed, and its stock's valuation metrics are in sync with its growth.

Although risks persist, I am confident in Lululemon's stock prospects.


I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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