What happened
Shares of Lululemon Athletica (LULU -0.03%) gained 14.2% in March, according to data provided by S&P Global Market Intelligence. The stock underperformed the market average for most of the month, as analysts lowered price targets and investors seemingly shrugged off news of the company's new product line. However, it reported earnings at the end of March, surpassing expectations, which led to market-beating gains for the month.
So what
Lululemon is know for its yoga pants that are popular among women. However, on March 8, the company announced it's officially expanding into footwear with four lines of women's shoes. While this is a new opportunity, keep in mind that Lululemon generated more than $6 billion in revenue in 2021. Therefore, shoes likely will take time to move the needle for Lululemon. And maybe that's why this news was met with a yawn from investors.
Image source: Getty Images.
Analysts on Wall Street spent most of March worrying about the bigger parts of Lululemon's business. Deutsche Bank analyst Gabriella Carbone noted ongoing supply chain problems when lowering their price target from $453 per share to $410 per share, according to The Fly. Other analysts also lowered their price targets on Lululemon stock, citing inflation, lower-margin international expansion, and valuation concerns, among other things.
Sleepy expectations were jolted awake when Lululemon reported full-year 2021 results on March 29. Its revenue of $6.3 billion was up 42% year over year and largely met analysts' expectations. However, its margin improved and the company delivered diluted earnings per share (EPS) of $7.49. Given the various headwinds, analysts were surprised by its ongoing operating leverage gains.
Now what
Lululemon shareholders should be happy that strong revenue growth and ongoing bottom-line leverage seem poised to continue. For 2022, management expects to generate revenue between $7.490 billion and $7.615 billion. At the low end of guidance, this represents 20% year-over-year growth. Moreover, it expects to earn diluted EPS of $9.15 to $9.35, representing 22% growth on the low end.
Business is booming, and perhaps this is why Lululemon's management feels so comfortable to buy back its own stock at a fast pace. During 2021, it spent $812 million repurchasing 2.2 million shares. And in the first quarter of 2022, it exhausted its buyback authorization by spending almost $188 million more buying back shares.
With the old repurchase authorization exhausted, Lululemon's management authorized a new $1 billion repurchase program. Considering its entire market capitalization is roughly $48 billion as of this writing, it's only authorized to buy back around 2% of shares. In other words, this will help EPS growth going forward, but only marginally. The bigger driver will be the underlying business. And for this reason, I recommend shareholders monitor the business fundamentals more than management's capital allocation plans.
