Company Reports

We think Lululemon has a solid plan to expand its product assortment and geographic reach while building its core business. While there are many firms looking to compete in its categories, we believe Lululemon benefits from the athleisure fashion trend and will continue to achieve premium pricing due to the brand’s popularity and the styling and quality of its products. Our narrow moat rating is based on the company's intangible brand asset.

Narrow-moat Lululemon’s fourth-quarter results exceeded our estimates, which had been raised after its January preannouncement. However, the firm acknowledged that sales have slowed in the first quarter in the US and it issued disappointing 2024 sales growth guidance of 11%-12%, shy of historical levels and our 14% estimate. Consequently, Lululemon’s shares fell by about 11% on March 21 postmarket trading. Even so, as the company’s 2024 EPS outlook of $14.00-$14.20 aligns with our $14.12 estimate and as it has a history of conservative guidance, we expect to increase our $278 fair value estimate by a low-single-digit percentage. We rate Lululemon’s shares, which trade at about 30 times forward earnings, as overvalued.

As usual, narrow-moat Lululemon updated its fourth-quarter outlook ahead of planned investor meetings in January. As has typically been the case over the past few years, its outlook update was upward, as it lifted its ranges for sales guidance to $3.17 billion-$3.19 billion from $3.135 billion-$3.17 billion, gross margin to 58.6%-58.7% from 58.3%-58.6%, and EPS to $4.96-$5.00 from $4.85-$4.93. We view these revisions as minor and believe that they were widely anticipated by investors given the firm’s usual practice of providing a conservative holiday season outlook. Indeed, Lululemon’s shares dipped about 1% in the immediate aftermath of the update, probably because investors had hoped for a greater revision, especially as most estimates (including ours) were already at the high end or above the prior guidance ranges.

We think Lululemon has a solid plan to expand its product assortment and geographic reach while building its core business. While there are many firms looking to compete in its categories, we believe Lululemon benefits from the athleisure fashion trend and will continue to achieve premium pricing due to the brand’s popularity and the styling and quality of its products. Our narrow moat rating is based on the company's intangible brand asset.

We think Lululemon has a solid plan to expand its product assortment and geographic reach while building its core business. While there are many firms looking to compete in its categories, we believe Lululemon benefits from the athleisure fashion trend and will continue to achieve premium pricing due to the brand’s popularity and the styling and quality of its products. Our narrow moat rating is based on the company's intangible brand asset.

As has been typical, narrow-moat Lululemon’s third-quarter sales and earnings exceeded its guidance and our expectations. These results bode well for a good finish to the year despite concerns about slowing consumer spending on apparel and a promotional holiday period across the industry. We expect to lift our $267 per share fair value estimate by a mid-single-digit percentage. However, we view Lululemon’s shares, trading at more than 35 times expected 2023 EPS, as overvalued, based on our 10-year discounted cash flow model and the threat of ever-increasing competition in athleisure.

We think narrow-moat Lululemon has a solid plan to expand its product assortment and geographic reach while building its core business. While there are many firms looking to compete in its categories, we believe Lululemon benefits from the athleisure fashion trend and will continue to achieve premium pricing due to the brand’s popularity and the styling and quality of its products. Our narrow-moat rating is based on its intangible brand asset.

Lululemon’s second-quarter results eclipsed our forecast despite soft apparel demand in North America. We believe the company is benefiting from the popularity of athleisure, its brand intangible asset (the source of our narrow moat), and its Power of Three x 2 plan for product innovation, international growth, and omnichannel investments. The firm raised its 2023 respective ranges for sales growth and EPS to 17%-18% from 16%-17% and to $12.02-$12.17 from $11.74-$11.94. While it may be a slight disappointment that it did not lift these ranges more given the results, management commentary about continuing momentum, and product launches, economic conditions are unsettled, and Lululemon has a history of low guidance.

We think narrow-moat Lululemon has a solid plan to expand its product assortment and geographic reach while building its core business. While there are many firms looking to compete in its categories, we believe the firm benefits from the athleisure fashion trend and will continue to achieve premium pricing due to the brand’s popularity and the styling and quality of its products. Our narrow-moat rating is based on Lululemon’s intangible brand asset.

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.

We think narrow-moat Lululemon has a solid plan to expand its product assortment and geographic reach while building its core business. While there are many firms looking to compete in its categories, we believe the firm benefits from the athleisure fashion trend and will continue to achieve premium pricing due to the brand’s popularity and the styling and quality of its products. Our narrow-moat rating is based on Lululemon’s intangible brand asset.

Lululemon’s fourth-quarter results for 2022 exceeded its preliminary announcement and our expectations (see our Jan. 9 note). Moreover, the firm offered guidance of 15% sales growth and $11.50-$11.72 in EPS (excluding share repurchases) for 2023, close to our 14% and $11.59 respective estimates but, given its momentum, likely conservative. Thus, we expect to lift our near-term forecast, leading to a mid-single-digit percentage increase in our $233 per share fair value estimate. However, we view Lululemon’s shares, up 13% in postmarket trading, as overvalued, at roughly 30 times forward earnings. We rate the firm as having a narrow moat and view it as a leader in the athleisure space, but believe its valuation does not fully reflect the threat of competition.

We think narrow-moat Lululemon has a solid plan to expand its product assortment and geographic reach while building its core business. While there are many firms looking to compete in its core categories, we believe the firm benefits from the athleisure fashion trend and will continue to achieve premium pricing due to the brand’s popularity and the styling and quality of its products. Our narrow-moat rating is based on Lululemon’s intangible brand asset.

With the holiday season wrapping up, Lululemon preannounced fourth-quarter revenue in the range of $2.66 billion-$2.7 billion, slightly above our estimate of $2.65 billion and its prior range of $2.605 billion-$2.655 billion. While this sales report implies solid growth of 25%-27%, it was overshadowed by a soft gross margin outlook, apparently due to discounting to clear excess inventory. Specifically, Lululemon now projects a gross margin decline of 90-110 basis points as opposed to the prior view of an increase of 10-20 basis points. The new range implies a gross margin of 57%-57.2%, which would be its first fourth-quarter gross margin below 58% since 2018. As discussed in our Dec. 9 note, Lululemon’s third-quarter ending inventories were up 85% from the previous year. At the time, management brushed off concerns that markdowns would be required, but slowing consumer spending appears to have taken a toll. However, Lululemon was able to mitigate the impact of the gross margin through operating cost leverage. The firm now expects a 100-120-basis-point improvement in its selling, general, and administrative expenses, outperforming our 80-basis-point estimate and its prior range of 30-50 basis points.

We think narrow-moat Lululemon has a solid plan to expand its product assortment and geographic reach while building its core business. While there are many firms looking to compete in its core categories, we believe the firm benefits from the athleisure fashion trend and will continue to achieve premium pricing due to the brand’s popularity and the styling and quality of its products. Our narrow-moat rating is based on Lululemon’s intangible brand asset.

Narrow-moat Lululemon’s 2022 third-quarter results included 22% comparable sales growth and were in line with our lofty expectations. Yet, its shares dropped by a mid-single-digit percentage in Dec. 8 post-market trading, possibly because it did not raise guidance for the holiday season and because its inventories jumped 85% from last year (as was also the case in the prior quarter). While a surge in inventories can imply slowing sales and lead to markdowns and margin degradation, Lululemon’s management expressed the opposite view, arguing that the high inventories will be needed to meet demand. Even so, the firm expects that year-end inventories will be up 60% from last year. For now, given the firm’s momentum and history of full-price sell-through, we are inclined to support management’s argument that the inventory levels are manageable. Indeed, we expect to lift our $229 fair value estimate by a low-single-digit percentage, although we view its shares, at about 35 times 2022 earnings, as overvalued.

We think narrow-moat Lululemon has a solid plan to expand its product assortment and geographic reach while building its core business. While there are many firms looking to compete in its core categories, we believe the firm benefits from the athleisure fashion trend and will continue to achieve premium pricing due to the brand’s popularity and the styling and quality of its products. Our narrow-moat rating is based on Lululemon’s intangible brand asset.

Lululemon recorded impressive results in 2022’s second quarter, showing little impact from the inflation, supply chain, and economic concerns that have slowed competitors. We believe the popularity of Lululemon’s brand, the source of our narrow-moat rating, has allowed it to overcome the industry’s challenges. Given its momentum, we expect to lift our $216 fair value estimate on its shares by a mid-single-digit percentage, but continue to view them as overvalued. Our concerns mainly lie with Lululemon’s valuation in an increasingly crowded activewear space that includes powerful participants like wide-moat Nike.

We think narrow-moat Lululemon has a solid plan to expand its product assortment and geographic reach while building its core business. While there are many firms looking to compete in its core categories, we believe the firm benefits from the athleisure fashion trend and will continue to achieve premium pricing due to the brand’s popularity and the styling and quality of its products. Our narrow-moat rating is based on Lululemon’s intangible brand asset.

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.