At first glance, athletic apparel retailer Lululemon (NASDAQ:LULU) seemingly can’t do any wrong, particularly after a strong earnings report. However, the trajectory of LULU stock depends largely on the Federal Reserve. How the central bank adjusts to present economic dynamics will necessarily impact broader consumer sentiment. Therefore, I am neutral on LULU.
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LULU Seems Like a No-Brainer Stock, but It May Not Be
On paper, Lululemon seems like a no-brainer proposition. As TipRanks contributor Steve Anderson pointed out, LULU stock popped over 5% higher in after-hours trading following the underlying enterprise releasing its fourth-quarter earnings report. Regarding profitability, the company produced earnings per share of $4.40, beating the consensus EPS estimate of $4.26.
On the top line, revenue jumped 30% on a year-over-year basis to $2.8 billion. This, too, beat analysts’ expectations, which stood at $2.7 billion. Further, the details provided some compelling food for thought.
Anderson stated that “comparable store sales were up 17% on a constant dollar basis. However, direct-to-consumer net revenue was up a whopping 39% on that constant dollar basis. Direct-to-consumer net revenue now accounts for 52% of all net revenue, up from 49% in 2021’s fourth quarter.”
Not only that, but for the first quarter of Fiscal Year 2023, “management expects net revenue to hit between $1.89 billion and $1.93 billion and EPS figures to come in between $1.93 and $2. For reference, consensus estimates expect $1.85 billion in revenue and $1.64 in EPS.”
By most measures, then, LULU stock seems a worthwhile investment. However, it’s the Fed that may have the last word.
Nonetheless, on TipRanks, LULU stock has a 9 out of 10 Smart Score rating. This indicates strong potential for the stock to outperform the broader market from here.
LULU Investors Should Avoid Excessively Celebrating
After a year of blistering inflation and the catastrophic ripple effects of Russia’s invasion of Ukraine, investors naturally questioned the viability of consumer discretionary investments like LULU stock. However, Lululemon’s performance indicates that some retail brands have maintained their appeal to consumers. Nonetheless, investors should refrain from excessive celebration regarding LULU, as there is still a long road ahead.
In particular, the Fed remains committed to tackling stubbornly high inflation by raising the benchmark interest rate. Also, the recent banking sector crisis doesn’t help. True, the U.S. government responded quickly and decisively regarding the failed institutions, undergirding depositors’ accounts.
However, where did the money to undergird the deposits come from? Essentially, the central bank had to open its balance sheet. To be fair, this action does not mean that the Fed will stimulate the economy. Nevertheless, supporting failed banks will likely yield a net inflationary outcome.
Looking forward, the Fed will probably be forced to act even more aggressively with its rate hikes. Unfortunately, that may put LULU stock in a bind. Additionally, as the Fed seeks to ultimately shrink its balance sheet to tame inflation, ongoing layoffs may accelerate. As a result, consumers may not have as much money to spend at their discretion over time.
Eventually, a hawkish monetary environment may see consumers being forced to choose what type of apparel to spend on — casual, athletic wear or attire appropriate for business. With employers taking back work-from-home privileges, the latter category may win out. That probably won’t be beneficial for LULU stock.
Financials Present a Mixed Case for the Apparel Giant
While LULU stock may face challenging headwinds, it’s not a decisive Sell by any means. Notably, its underlying financials present much encouragement for investors.
Perhaps most importantly, at this juncture, Lululemon enjoys a stout, relatively cash-rich balance sheet. For instance, its cash-to-debt ratio is 1.08 times, better than the sector median value of 0.5 times. Additionally, its Altman Z-Score – a measure of bankruptcy risk – hits 14.63, indicating an extremely low risk of imminent failure.
Operationally, Lululemon commands a three-year revenue growth rate of nearly 24%, beating more than 80% of the competition. Also, on the bottom line, its net margin is 10.54%, above 86.6% of sector peers.
So, what’s not to like? Right now, LULU stock is significantly overvalued. Currently, the market prices LULU at a forward multiple of about 32. This ranks higher (worse) than ~86% of its competitors.
Is LULU Stock a Buy, According to Analysts?
Turning to Wall Street, LULU stock has a Moderate Buy consensus rating based on 22 Buys, two Holds, and three Sell ratings. The average LULU stock price target is $394.48, implying 7.55% upside potential.
The Takeaway: LULU Stock Intrigues, but Better Opportunities Abound
Based on key statistics, LULU stock presents an interesting investment idea. First, the underlying retailer posted strong Q4 results. In addition, LULU benefits from overall robust financials. Still, on the other hand, it’s overvalued relative to projected earnings. As well, better opportunities may exist now that the trade has become crowded.
