Lululemon (LULU) has lost nearly 53% so far this year, but I believe it’s approaching its value territory. Many pessimists are fearful about the group’s slowing U.S. business, but they’re all missing some solid points to like about this stock.
Don't Miss our Black Friday Offers:
- Unlock your investing potential with TipRanks Premium - Now At 40% OFF!
- Make smarter investments with weekly expert stock picks from the Smart Investor Newsletter
Lululemon is an activewear and athleisure company that became popular among women for its iconic yoga pants. Today, the company makes all sorts of athletic apparel, footwear, and accessories for both men and women and operates in over 25 countries globally, including the Americas, China Mainland, Asia Pacific, Europe, and the Middle East.
I am bullish on Lululemon because it’s doing a good job stealing market share from competitors, its management has a solid growth strategy, and it has material potential in international markets.
Is Lululemon a Winner?
Yes, I believe Lululemon is a winner. The company has been competing against legacy brands like Nike (NKE) and Under Armour (UAA) and has come out on top. Over the past decade, Lululemon’s revenue has compounded at 20% annually, while Nike has grown by only 6% over the comparable period.
Some investors claim LULU Has ambitious goals without a solid plan, but that’s hearsay. Lululemon’s growth strategy and priorities are simple: product innovation, guest experience, and market expansion.
Lululemon entered the men’s market in 2014 and did well on the execution front, meeting its men’s growth target two years before management’s anticipated target. The company’s on track to hit its Fiscal 2026 goals of doubling sales to $12.5 billion, doubling men’s revenue, doubling e-commerce, and quadrupling international sales from 2021 levels.
When I look at the fundamentals, I see a consistent grower. Lululemon went from just $1 billion in sales back in 2011 to $9.6 billion in 2023. Not only that, but it’s also been able to charge a premium to consumers because everyone’s in love with the Lululemon brand. Its gross margins have held steady, well above 50%, for the better part of the past five years. On a trailing 12-month basis, Lululemon’s gross margin is 58.35% as of April 30, 2024.
Warren Buffett once said, “Retailing is a tough business,” and I agree. It’s just a low-barriers-to-entry market where you really need to stand out if you want your product to sell. Over the past 10 years, the company’s net income has grown at a compound annual growth rate (CAGR) of 20.20%. It wouldn’t be wrong to say that Lululemon is a profitable winner in an extremely competitive industry.
Why Is the Stock Down?
I looked at LULU stock a few months ago when it was trading at $450 and thought, “No way, I’m gonna pay 30 times earnings.” That was then. But now, at current levels, it’s enticing.
The bears are concerned about a slowdown in sales, particularly in the Americas (79% of net revenue in 2023). Also, in the first quarter of 2024, total net revenue grew 10% year-over-year to $2.2 billion, and comparable store sales grew 7% from last year. America’s revenue growth slowed down to 3% year-over-year from 17% in the comparable period last year. Moreover, same-store sales were flat.
This caught the attention of a lot of pessimists on Wall Street. Management attributed this slowdown to a challenging environment in the U.S. as higher interest rates are making consumers selective with their purchases. Moreover, it also faced some internal issues within its women’s segment due to fewer color options and an unavailability of small sizes. Overall, its women’s business grew 10% year over year during the quarter.
On the bright side, men’s revenue grew 15% year-over-year, and LULU’s products are just becoming popular with men. It’s apparent the company’s got some cards up its sleeves for the back half of 2024 and expects to launch many different innovative products. For the full year, Lululemon expects revenue to grow between 10% and 11% to $10.7 billion to $10.8 billion.
While Lululemon is losing favor with U.S. consumers due to competition from smaller players like Alo Yoga and Vuori, its international business is booming and has great potential.
International sales made up about 21% of net sales in 2023, and management aims to grow them to 50% of net sales in the long term. Its China business grew 52% year-over-year in Q1 2024, and the rest of the world grew 30% from last year.
The international market presents a strong avenue for Lululemon to grow in the long-term. The company is opening new stores, and its 2024 target is 35 to 40 new stores, of which 5 to 10 stores will be in the Americas and the rest around the globe.
Lululemon may have halved in 2024 due to internal missteps and macro factors. However, the company’s fundamentals remain strong, its growth strategy remains intact, and I don’t see LULU stock being down for long.
Be Greedy When Others Are Fearful
The Street is fixating on a few short-term hiccups and is overlooking a lot of what I just listed above in my thesis. You’ve got a company with a strong brand and pricing power. LULU’s kept its gross margins at more than 50% of sales for a long period of time, and plan on continuing this trend.
Growing sales is a top priority for management, but does that mean it comes at the expense of profitability? No. For the full year, Lululemon expects diluted EPS between $14.27 to $14.47, up from $12.77 in 2023.
Even if Lululemon compounds at just 10% (half its long-term average) over the next 10 years, according to my conservative forecast, it’ll reach $28 billion in sales.
So, why be fearful when you’ve got a high-quality business with a lot of runway? Timing the bottom is futile; I believe LULU stock has paid its due.
Analysts’ Take on LULU Stock
On Wall St., LULU stock sports a consensus Moderate Buy rating based on 13 Buy, 8 Hold, and 1 Sell rating. The average price target points to an upside of 54.02% from current levels.
The Bottom Line
Lululemon was overhyped a few months ago, but now, at 16.8 times forward earnings, I believe it’s a wonderful business at a fair price. An under-penetrated international business coupled with new product innovations will help this high-quality business thrive in the long term. For all those reasons, I am bullish on LULU’s stock.
