Lululemon Athletica (LULU 1.74%) recently impressed investors with a solid first-quarter earnings report. The athletic apparel retailer's revenue rose 32% year over year to $1.61 billion, beating analysts' estimates by $60 million, as its comparable-store sales increased 28%.
Its net income grew 31% to $190 million, or $1.48 per share, which also exceeded the consensus forecast by a nickel. Those growth rates are impressive, but Lululemon's stock remains nearly 40% below its all-time high from last November. Let's review three reasons to buy Lululemon -- and one reason to sell it -- to see if it's a turnaround play.
Image source: Getty Images.
1. A rapid post-lockdown recovery
Like most other apparel retailers, Lululemon's growth cooled in 2020 as it temporarily closed its brick-and-mortar stores during the onset of the pandemic. However, the growth of its direct-to-consumer (DTC) channel, which primarily consists of its e-commerce sales, largely offset those headwinds.
Its revenue only rose 11% in fiscal 2020 (which ended in January of the calendar year), but surged 42% to $6.3 billion in fiscal 2021 as it reopened its stores against easy year-over-year comparisons.
Lululemon temporarily stopped reporting its comparable-store sales and total comps (including DTC) in the first half of 2021 due to its widespread store closures a year earlier, but it brought back that key growth metric over the past three quarters. As seen in the following chart, its growth in comparable-store sales, DTC sales, and total comps have all remained robust over the past year.
|
Growth (YOY) |
Q1 2021 |
Q2 2021 |
Q3 2021 |
Q4 2021 |
Q1 2022 |
|---|---|---|---|---|---|
|
Comparable Store Sales |
-- |
-- |
32% |
32% |
24% |
|
DTC Sales |
55% |
8% |
23% |
17% |
32% |
|
Total Comparable Sales |
-- |
-- |
27% |
22% |
28% |
|
Total Revenue |
98% |
61% |
30% |
23% |
32% |
Data source: Lululemon. YOY = Year-over-year.
For the second quarter, Lululemon expects its revenue to rise 17%-18% year over year. For the full year, it expects its revenue to increase 21%-22%.
That annual guidance would represent 24%-25% growth on a three-year compound annual growth rate (CAGR) basis, which smooths out the company's lumpy growth rates through the pandemic.
2. A new "Power of Three" plan
Three years ago, Lululemon introduced its "Power of Three" goals: It aimed to generate double-digit annual revenue growth through the end of fiscal 2023 by doubling its men's revenue, doubling its digital revenue, and quadrupling its international revenue relative to fiscal 2018.
The pandemic initially cast some doubts on those ambitious plans. However, it actually achieved its e-commerce and men's targets well ahead of schedule in fiscal 2021, and it remains on track to hit its international target by the end of fiscal 2022.
This April Lululemon launched a new five-year growth plan, dubbed the "Power of Three x2" plan, which aims to roughly double its annual revenue from $6.3 billion in fiscal 2021 to $12.5 billion by fiscal 2026. Once again, it plans to hit that target by doubling its men's and digital revenues -- as well as quadrupling its international revenue again -- relative to fiscal 2021.
I'm usually skeptical about grand five-year growth plans, but Lululemon's ability to achieve its prior targets -- even as it faced unprecedented headwinds throughout the pandemic -- strongly suggests it can also hit those new targets. Lululemon's ability to consistently expand its brick-and-mortar footprint -- it increased its store count by five locations to 579 in the first quarter -- as many other apparel retailers aggressively shuttered their stores to cut costs is also a bullish sign.
3. Stable margins and earnings growth
Lululemon's gross margin declined sequentially and year over year to 53.9% in the first quarter, and it expects that year-over-year contraction to continue in the second quarter and the full year. It attributes that compression to higher air freight costs, supply chain constraints, and increased DTC investments.
However, its operating margin still expanded year over year in the first quarter, and it expects that figure to stay "approximately flat" from fiscal 2021, even as higher costs squeeze its gross margins.
|
Period |
Q1 2021 |
Q2 2021 |
Q3 2021 |
Q4 2021 |
Q1 2022 |
|---|---|---|---|---|---|
|
Gross Margin |
57.1% |
58.1% |
57.2% |
58.1% |
53.9% |
|
Operating Margin |
15.8% |
20.1% |
17.8% |
27.7% |
16.1% |
Data source: Lululemon.
Even amid those headwinds, Lululemon generates much higher gross margins than many of its industry peers. Gap (GPS 1.05%) (which competes against Lululemon with its Athleta brand) and Nike (NKE 1.55%) posted gross margins of 31.5% and 46.6%, respectively, in their latest quarters.
Lululemon's industry-leading margins, along with its consistent buybacks, should enable it to generate robust earnings growth this year. It expects its adjusted earnings per share (EPS) to rise 10%-13% year over year in the second quarter, and to increase 20%-22% for the full year.
The one reason to sell Lululemon: Its valuation
Lululemon's only weakness is its valuation. At $290 per share, it isn't cheap at about 30 times this year's adjusted earnings. Gap trades at just eight times forward earnings, which reflects its recent troubles, while Nike has a forward price-to-earnings ratio of 24.
However, I believe Lululemon's other strengths easily justify that higher valuation. Therefore, investors should simply accumulate more shares of this high-growth retailer and tune out the near-term noise.
