Lululemon Athletica (LULU 1.43%) is a burgeoning athletic apparel maker, challenging well-established incumbents in the industry that are much larger and have longer operating histories. The pandemic certainly boosted demand for the company's premium-priced products, as stay-at-home orders led to a heightened focus on comfortable clothing. But 2022 is off to a disappointing start for shareholders, with the stock price down about 21% since the start of the year.
After starting the year down so significantly, is Lululemon stock a buy in 2022? Some important clues tell us that it just might be.
Image source: Getty Images.
Don't worry about the supply chain
Lululemon shares actually started their slide downward in mid-November, when the stock hit an all-time intraday high of $485.82. In early December, the company crushed Wall Street's estimates when it reported fiscal 2021 third-quarter (ending Oct. 31) financial results, but surprisingly, that didn't help the stock bounce back. And most recently, management issued a press release on Jan. 10 stating that fiscal fourth-quarter revenue and adjusted earnings per share would come in at the low end of guidance, near $2.125 billion and $3.25, respectively.
"We started the holiday season in a strong position but have since experienced several consequences of the Omicron variant," CEO Calvin McDonald explained in the press release, "including increased capacity constraints, more limited staff availability, and reduced operating hours in certain locations."
This echoes what Nike (NKE -1.26%) management previously called out as it pertains to a burdensome supply chain. It's not surprising that Lululemon is facing the same issues. The good news is that supply chain problems are being felt by companies across the globe, so it's not specific to Lululemon's business. I believe management will be able to weather the current storm.
Compared to bigger rival Nike, which generated 25% of sales via the digital channel in its latest fiscal quarter (ended Nov. 1), direct-to-consumer (DTC) revenue represented 40% of Lululemon's business during its fiscal 2021 third quarter. And during the height of the pandemic in fiscal 2020 Q2, an incredible 61% of Lululemon's sales came from online orders.
Although procuring and transporting inventory right now is proving to be a challenge, the company's strong DTC presence positions it well in case new coronavirus variants restrict physical shopping.
The brand is powerful
Lululemon's greatest competitive advantage lies in its brand recognition. According to Piper Sandler's fall "Taking Stock With Teens" survey, Lululemon is the fifth-most-popular clothing brand among this young demographic. Lululemon's gross margin of 57.2% exemplifies inherent pricing power, a key attribute of powerful consumer brands.
Even if Lululemon hit the low end of management's guidance for fiscal 2021, sales would see a 42% year-over-year increase, while adjusted earnings per share would jump 71%. Just looking at these numbers, you would see no reason why the stock should be performing as poorly as it has lately.
Lululemon rose to prominence because of how popular its yoga pants were with women. But the business's biggest growth segment is with male customers. In the most recent fiscal quarter, men's sales rose 44%, much faster than the 25% growth registered by the women's segment.
Additionally, having a larger presence in international markets will help support the brand's relevance on a global scale. For the entire fiscal year of 2021, Lululemon plans to open 40 to 45 net new stores (out of 50-55 total) outside of the U.S. and Canada. This will raise awareness for the brand, as well as diversify the company's geographic reach.
Attractive valuation
With the apparent pessimism surrounding the stock today, Lululemon shares now trade at a price-to-earnings ratio of 47. This is the lowest multiple the stock has sold for since the beginning of the pandemic in the spring of 2020 nearly two years ago. It appears to be an extremely attractive valuation for prospective investors to scoop up shares given the remarkable revenue and profit growth the business has registered throughout the years.
While its clothing might never go on sale, Lululemon's stock is being offered at a discount right now that shareholders might want to seriously consider.
