Lululemon: A Closer Look At Financials, Growth Prospects, And Market Trends (LULU) (2024)

Lululemon Athletica (NASDAQ:LULU) has made a name for itself in the sports apparel industry by focusing on quality, function, and form. The brand started off catering mainly to women but has since expanded into men's apparel. Thanks to its strong brand appeal, retail expansion, and management execution, Lululemon has seen impressive growth in sales and earnings over the past decade. While the company's management hopes to increase profitability further, it hasn't demonstrated consistent success in this area, so I take that guidance with a grain of salt. Nonetheless, with revenue on the rise and earnings following suit, there are good reasons to be bullish on Lululemon. Despite a recent drop in stock price, the company's fundamentals remain strong, making it a potentially attractive opportunity for investors looking to enter the market.

A premium brand

Lululemon's powerful brand presence is a key reason why the company has enjoyed such strong financial performance over the years. The premium prices of Lululemon's most popular products, such as the $128 ABC Jogger for men and the $98 Align Super-High-Rise Pant for women, reflect the brand's commitment to high-quality materials and manufacturing processes.

One of the benefits of this premium pricing strategy is Lululemon's strong pricing power. In fiscal year 2022, the company's gross margin was an impressive 55.4%, higher than competitors Nike (NKE) and Adidas (OTCQX:ADDYY). What's even more remarkable is that Lululemon has managed to consistently increase its gross margin relative to its competitors, and the company is forecasting further increases of between 140 and 160 basis points for the coming year.

Another advantage of Lululemon's brand strategy is its reliance on company-operated stores and direct-to-consumer (DTC) sales channels because it doesn't rely much on third-party retailers to push its merchandise. In the previous fiscal year, 91% of the company's revenue was derived from these channels, giving Lululemon greater control over branding and distribution. This approach allows the company to maintain its high standards and ensure that its products are always presented in the best possible light, which bodes well for its long-term relevance in the marketplace.

Financials

Lululemon has seen tremendous growth in revenue over the last three years, with quarterly revenue growth at a compound annual growth rate of 27%, skyrocketing from $3.9 billion to $8.1 billion. This impressive growth continued even through major events such as the pandemic, supply chain issues, and inflation, with the business posting more than 22% year-over-year sales gains for 10 straight quarters. The company's earnings have also grown substantially, with net income surging from $646 million to $855 million, and a quarterly EPS of $4.40, beating estimates by $0.14, marking a 31% increase over Q4 2021.

Lululemon's success can be attributed to the popularity of its comfortable, stylish, and high-end athleisure gear. The company has identified China as a key growth engine, with plans to open 30 to 35 new stores in international markets, primarily in China, in 2023. Additionally, Lululemon plans to launch a footwear line for men in 2024, with the men's category growing faster than the women's segment over the last three years. The company's digital channel, which already accounts for 52% of company-wide sales in the most recent fiscal quarter, is also expected to drive further gains for Lululemon.

Net income decreased to $854 million from $975 million in the previous year due to the impairment of goodwill and other assets of $407 million related to the acquisition of Mirror, which has been a disappointment for the company. Rumors have surfaced that Lululemon is trying to sell Mirror though the company is not eliminating the hardware entirely. Instead, it will no longer be a requirement, and, Chief Executive Officer Calvin McDonald, has said its new app will launch this summer with a lower subscription rate.

When Lululemon acquired Mirror for $500 million in 2020, it was seen as an opportunity to build upon the company's vision of being "the experiential brand that ignites a community of people living the sweatlife." However, the acquisition was a lesson in limitations and demonstrated that Lululemon is more adept at fashion trends than high-priced exercise equipment.

Despite the Mirror setback, Lululemon has pushed harder toward fitness apps as a way to connect with customers and create a community that doesn't require a large up-front investment.

The company's balance sheet remains healthy, despite some analysts' concerns that rising inventories would lead to drastic price cuts. Inventory grew 50% to $1.4 billion, which could be seen as a yellow flag. While some of this growth could be attributed to the company's expansion and opening of new stores, it could also indicate that demand is not as strong as anticipated, which is common during an impending recession. This could result in inventory write-offs. Additionally, accounts receivable grew 72% to $132 million, which, while a relatively small number, is still cause for concern as it means more sales are being sold unpaid. The company has not recorded a material allowance for doubtful accounts in the last three years, and I don't expect this to change.

While the company's total debt has increased 21% to $1.1 billion, the net debt position remains negative, which is a healthier status. The company has been decreasing diluted shares outstanding, having repurchased $444 million worth of common stock in the last financial year.

Guidance

Management provided optimistic guidance for the upcoming fiscal year, with projected revenues between $9.3 and $9.41 billion, reflecting a remarkable 15 to 16% increase year-over-year. While Seeking Alpha expects revenue in line with the company's projections, it anticipates a lower YoY revenue growth rate moving forward. Furthermore, the adjusted diluted EPS for FY23 is expected to fall within the range of $11.50 to $11.72, representing a substantial year-over-year growth rate of 14.2% to 16.4%.

Stock Price vs Revenue Mismatch

Lululemon's stock is currently trading at the higher end of the 52-week range, furthermore, its valuation only receives a D minus from Seeking Alpha, despite receiving a B plus or above for growth, profitability, momentum, and revisions.

There appears to be a mismatch between the company's revenue growth and its stock price, which could present an opportunity for aggressive investors.

As a general rule, a stock price tends to follow a company's earnings, and Lululemon is no exception. Over the last ten years, Lululemon's stock price has closely followed the company's earnings, despite being more volatile in the short term. Although the stock price fell in 2022, it has not yet recovered, despite the company's earnings increasing quarter over quarter. It's worth noting that I am ignoring the impairment of goodwill, which is a one-off expense.

Conclusion

Lululemon's fourth-quarter results showed that the company is still able to maintain its premium pricing strategy for its high-end athleisure products. While the acquisition of Mirror has been a disappointment for the company and has weighed on its stock price, rumors of a potential sale may allow Lululemon to refocus on its core strengths.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

I hold a master's degree in Financial Analysis and a degree in Management. My passion for finance and investing drives me to continually learn and improve my skills. Currently, I am studying for the CFA Level II exam and enjoy writing equity research articles to enhance my understanding and share my insights with others.