Lululemon Earnings: Rare Sign of Weakness Overshadows Solid Results

Key Morningstar Metrics for Lululemon Athletica

• Fair Value Estimate: $278.00
• Morningstar Rating: 1 star
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

What We Thought of Lululemon Athletica’s Earnings

Lululemon Athletica’s LULU fourth-quarter results exceeded our estimates, which had been raised after the firm’s January preannouncement. However, the company acknowledged that sales slowed in the United States in the first quarter, and it issued disappointing 2024 sales growth guidance of 11%-12%, shy of historical levels and our 14% estimate.

Consequently, Lululemon’s shares fell about 11% during March 21 after-hours trading. Even so, the company’s 2024 earnings per share outlook of $14.00-$14.20 aligns with our $14.12 estimate, and it has a history of conservative guidance. We therefore 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.

Led by a 17% increase in digital sales, Lululemon’s 16% fourth-quarter sales growth eclipsed our 15% estimate. Same-store sales growth of 12% was lower than recent levels, but certainly impressive compared with activewear peers. Gross and operating margins of 59.4% and 28.5%, respectively, exceeded our estimates by 70 basis points and led to EPS of $5.29, which beat our forecast by $0.30. In the long run, we think Lululemon’s gross margins will remain around 58%. Meanwhile, sales leverage, product mix, and international expansion will lift the firm’s operating margins to about 26% by 2030 from 23% in 2023.

The activewear market is increasingly competitive, and many industry participants have warned of weak US demand in 2024. Lululemon has seemingly been immune to competition and economic conditions for years, but realistically speaking, its domestic store and sales growth is slowing. The firm’s 2023 comparable sales growth was 8% in the Americas, and it opened just 19 stores (net). However, it still has great ambitions in other regions, especially China, where the company achieved 39% same-store sales growth in 2023 and has just 127 stores, far fewer than some competitors.