Narrow-Moat Lululemon Faces Sizzling Demand but Some Product and Margin Challenges; Shares Expensive

Demand for narrow-moat Lululemon’s wares remained hot in the first quarter as its 32% sales growth surpassed our 25% forecast. However, its gross and operating margins of 53.9% and 16.1%, respectively, fell short of our 55% and 16.9% estimates as it paid for air freight to reduce stockouts caused by shipping delays. We expect to lift our fair value estimate of $208 per share by a low-single-digit percentage but continue to view Lululemon’s shares as overvalued.