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Lululemon Athletica Inc LULU

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Lululemon Shows Some Unusual Holiday Weakness as COVID-19 Takes a Toll; Shares Very Overvalued

David Swartz Equity Analyst

Analyst Note

| David Swartz |

Citing challenges due to the recent COVID-19 resurgence, including supply problems, labor shortages, and reduced store hours, narrow-moat Lululemon preannounced sales and EPS expectations for 2021’s fourth quarter at the low end of prior guidance of sales of $2.125 billion-$2.165 billion and adjusted EPS of $3.25-$3.32. We were anticipating adjusted EPS of $3.31 on sales of $2.162 billion. Lululemon’s share price dropped by a mid-single-digit percentage on the news and has now fallen about 30% from its all-time high in November. Even so, we still view it as significantly overvalued in relation to our our fair value estimate of $193. Although one mild earnings miss does not materially impact our valuation, we have long had concerns that it is priced to perfection in a very competitive industry. Moreover, in the short term, it appears the COVID-19 effects could linger well into 2022 as there are new restrictions in some areas and there are reports of factory shutdowns in Asia. We expect to update our estimates after Lululemon reports its full results in March. As a corporate tax hike in the U.S. now appears unlikely, this update will include a reduction in our long-term tax rate assumption that could lift our fair value estimate by a mid-single-digit percentage.

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Company Profile

Business Description

Lululemon Athletica Inc. designs, distributes, and markets athletic apparel and accessories for women, men, and girls. Lululemon offers pants, shorts, tops, and jackets for both leisure and athletic activities such as yoga and running. The company also sells fitness accessories, such as bags, yoga mats, and equipment. Lululemon sells its products through more than 550 company-owned stores in 17 countries, e-commerce, outlets, and wholesale accounts. The company was founded in 1998 and is based in Vancouver, Canada.

1818 Cornwall Avenue
Vancouver, BC, V6J 1C7, Canada
T +1 604 732-6124
Sector Consumer Cyclical
Industry Apparel Retail
Most Recent Earnings Oct 31, 2021
Fiscal Year End Jan 31, 2022
Stock Type Cyclical
Employees 25,000