Lululemon Earnings: Year Off to Strong Start With No Signs of Slowdown; Valuation Stretched

Lululemon Athletica posted typically stellar results in its first quarter as 24% sales growth soared past our 19% estimate. Moreover, it appears to be untouched by the slowing demand for apparel in North America, reporting low markdown rates and offering solid guidance. We think it is benefiting from the strength of its brand—the source of our narrow moat rating—and its relatively high-income customer base. We expect to lift our $247 fair value estimate by a mid-single-digit percentage. Even so, we view Lululemon shares, up about 13% in postmarket trading, as overpriced. Our concerns stem from the rising competition in activewear, the uncertainty related to international expansion, and the hefty valuation. Even though we forecast Lululemon can achieve 11% annual sales growth and lift operating margin to about 25% from 22% over the next decade, its current P/E of about 30 is high in relation to our projection of midteens annual EPS growth.