In the short term, the stock market tends to be very unpredictable. Investor sentiment regarding any single stock can change instantly for a variety of reasons. Over the long term, however, stock prices tend to follow their companies' underlying fundamental performance. Even so, it's still fun to try and predict how we think some popular tickers will perform over the coming year.
Enter Lululemon Athletica (LULU -2.46%). Although the business has done exceptionally well recently, the stock price is up just 16% this year, trailing the S&P 500's 25% gain. Shareholders ought to be wondering what the future for this leading athletic apparel business holds.
Could Lululemon see its stock price hit $500 by 2023? Let's explore the idea and see if we can find an answer.
Lululemon is generating strong momentum
Lululemon just reported stellar financial results for its fiscal 2021 third quarter. Revenue jumped 30% to $1.5 billion, and net income soared 31%. Both figures easily beat Wall Street estimates. The direct-to-consumer channel, which includes orders from the company's website, represented 40% of overall sales.
The company has developed a competitive advantage in the form of its powerful brand. A remarkable gross margin of 57.2% demonstrates Lululemon's pricing power and premium status. What started out as a women's yoga outfitter has since turned into a business selling popular apparel items for men as well. In fact, on a two-year annualized basis, the men's segment has grown 29%, while women's has increased 24%.
And while Lululemon isn't immune to supply chain problems wreaking havoc on the entire economy, management expects to be able to meet holiday demand in the current quarter. Thanks to greater investment in air freight and the ability to prioritize certain product categories, navigating the current economic environment won't be too difficult.
"We're pleased with our position," said CEO Calvin McDonald on the Q3 earnings call. "We're pleased coming out of November. We knew that we needed to have a strong start to the quarter and we achieved that."
Revenue in Q4 is projected to come in just shy of $2.2 billion. For the full fiscal year of 2021, management upgraded guidance and is now forecasting sales of $6.25 billion to $6.29 billion.
I see this momentum carrying over into 2022, particularly with the positive developments in the men's segment and continued product innovation. What's more, international expansion, supported by an estimated 40 to 45 new store openings overseas this fiscal year, will help introduce the brand on a global stage.
So why did the stock underperform this year?
As I mentioned in the introduction, Lululemon has lagged the S&P 500 in 2021, even though the business is doing well. A 50% rise in the stock price in 2020 was a tough act to follow this year. And while the business doesn't believe that supply chain challenges pose a serious threat over the near term, I think the market is still very much using a wait-and-see approach. As a result, investors have cooled on the stock.
Looking ahead, slowing growth in the company's Mirror segment, with projected 2021 sales of $125 million to $130 million (down from prior guidance of $250 million to $275 million), can definitely be a headwind. Although Mirror represents less than 3% of Lululemon's total sales, management's pessimistic outlook is a sign that the at-home fitness market isn't booming like it was during 2020. This could add downward pressure to the stock next year.
Let's run the numbers
At a current stock price of $409.58 (as of market close on Dec. 10), Lululemon stock would have to gain roughly 22% over the next 12 or so months to hit the $500 target by 2023 -- not unreasonable at all given the strong brand recognition and the trajectory of the business in recent years.
According to consensus analyst estimates, Lululemon is forecast to produce earnings per share (EPS) in fiscal 2022 of $9.26, which is 20% higher than the $7.73 per share the company is expected to generate for this fiscal year. Wall Street has had to periodically raise its outlook as Lululemon keeps executing extremely well, so heightened EPS guidance as the next fiscal year progresses is very much likely.
If we assume that the stock maintains its current price-to-earnings ratio of 64, an elevated valuation is justified by the quality and growth of the company, then closing in on a share price of $500 is certainly in the realm of possibility.
Lululemon is one of the best apparel stocks out there. Investors would be wise to add this one to their portfolios.