Market Share Gains for Lululemon but Valuation Stretch
New store openings and comparable sales growth will moderate long term as the athletic apparel market becomes more saturated and the athleisure trend fades.
Third-quarter comparable sales growth of 8% and 110 basis point adjusted gross margin expansion (to 52.2%) demonstrated Lululemon’s (LULU) continued market share gains and pricing power—the basis for our recent increase in moat rating to narrow.
We plan to increase our fiscal 2017 revenue growth estimate (currently at 10%) to reflect this quarter’s 14% top-line growth, which will increase our $59 fair value estimate by $1-$2.
We still believe new store openings and comparable sales growth will moderate long term as the athletic apparel market becomes more saturated and the athleisure trend fades. We saw nothing to change our outlook, which calls for 9% average annual top-line growth over the next five years and operating margins exceeding 20% by 2021 (versus 2016’s 18%). We currently view shares as overvalued.
Our long-term sales assumptions are driven primarily by opportunities in menswear, international, and e-commerce (DTC segment). Male guest transactions grew 21% in the quarter, bolstering our view that menswear can account for about 23% of sales by 2021, up from 18% last year.
International sales strength was largely thanks to Asia, with market growth of about 100% in the quarter, supporting our belief that most of the company’s new store growth can be in that market. DTC sales grew more than 25% for the second straight quarter. While this runs ahead of the mid-teens growth we forecast for the year, it overshadows tepid same-store-sales (up 1% constant currency in the third quarter), leading us to believe that further acceleration comes at the expense of store sales rather than producing incremental revenue.
The channel shift to e-commerce may accelerate, but we don’t view even higher DTC sales altering our view of the company, as we think they would further cannibalize store sales. In aggregate, we are comfortable with our sales assumptions that call for low-double-digit DTC growth and low-single-digit same-store sales growth on average over the next five years.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.
Bridget Weishaar does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.