Lululemon Earnings: Strategic Moves and Brand Strength Overcome Economic Concerns

Lululemon Stock at a Glance

• Fair Value Estimate: $259.00
• Morningstar Rating: 2 stars
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow

Lululemon Earnings Update

Lululemon’s LULU 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 guidance for 2023 sales growth to 17%-18% from 16%-17% and its outlook for earnings per share growth to $12.02-$12.17 from $11.74-$11.94. While it may be a slight disappointment that Lululemon did not lift these ranges more, economic conditions are unsettled, and the company has a history of low guidance.

We expect to raise our fair value estimate of $259 per share by a mid-single-digit percentage due to the second-quarter outperformance and outlook. However, as Lululemon stock is trading at about 30 times earnings in a competitive market, we rate it as overvalued.

Lululemon’s 18% sales growth in the quarter beat our 16% estimate. By segment, its 15% online sales (41% of the quarter’s total) growth was shy of our 20% forecast, but 21% growth in store sales (50% of the total) was above our 14% estimate. Over the long term, we forecast annual online and offline sales growth of about 14% and 7%, respectively. Although Lululemon’s international awareness and e-commerce are less developed than in North America, its partnerships with wide-moat Alibaba’s BABA Tmall and JD.com JD in China and a new deal with Zalando ZLDSF in Europe should allow for quicker progress.

Lululemon’s gross margin of 58.8% and operating margin of 21.7% were above our estimates by 30 and 50 basis points, respectively. Like other apparel firms, the company is benefiting from lower freight costs. In the long run, we think it can hold its gross margin around 58% and improve its operating margin to about 25% as it continues to gain share, achieve premium pricing, and build its digital sales.