Why Is Everyone Talking About Lululemon Stock?

Lululemon's (LULU -1.26%) stock rallied nearly 7% on Sept. 2 in response to its strong second-quarter earnings report. The athletic apparel retailer's revenue rose 29% year over year to $1.87 billion, beating analysts' expectations by $100 million. Its comparable-store sales increased 23%, or 25% on a constant currency basis.

Its adjusted net income rose 30% to $281 million, or $2.20 per share, which also easily cleared the consensus forecast by $0.34. Those growth rates generated a lot of positive buzz on Wall Street, since they indicated that Lululemon was well insulated from the inflationary and supply chain headwinds that had been crushing many other apparel retailers.

Image source: Getty Images.

Lululemon is still firing on all cylinders

Lululemon is resistant to inflation because it sells its pricier yoga apparel, activewear, shoes, and accessories to more affluent consumers. It also locks in those shoppers with free yoga classes and events at its stores.

Back in fiscal 2020 (which ended in January 2021), its revenue rose 11% even as it temporarily closed many of its stores during the pandemic. It achieved that growth by more than doubling direct-to-consumer (DTC) sales to offset a 34% decline in brick-and-mortar sales. In fiscal 2021, revenue soared 42% to $6.3 billion as it reopened its stores against easy year-over-year comparisons. But even after lapping that impressive recovery, Lululemon's brick-and-mortar comps, DTC sales, and total comps continued to grow at double-digit rates.

Data source: Lululemon. YOY = year over year. *Not reported due to temporary store closures during the pandemic.

That robust growth indicates that Lululemon remains the clear leader of the higher-end athleisure apparel market. By comparison, Gap's athleisure brand Athleta posted declining comps over the past two quarters.

Sticking to its new "Power of Three" targets

Lululemon's growth has also been balanced across all of its product categories. During the second quarter, sales of men's apparel rose 27% year over year, sales of women's apparel grew 24%, and sales of accessories jumped 80%. In terms of geographies, North American revenue rose 28% as international revenue increased 35%.

Those growth rates indicate Lululemon remains on track to achieve its new "Power of Three x2" goals it unveiled back in April. That five-year plan calls for Lululemon to roughly double its annual revenue from $6.3 billion in fiscal 2021 to $12.5 billion in fiscal 2026, by doubling its men's and digital revenue while quadrupling its international revenue.

The updated goals for Lululemon's men's, digital, and international businesses are identical to the previous five-year growth targets it set forth with the original "Power of Three" plan in April 2019. It already achieved most of those goals ahead of schedule in 2021 by doubling its e-commerce and men's revenues (relative to fiscal 2018), and it should easily clear its goal of quadrupling its international revenue by the end of fiscal 2022.

Lululemon achieved its original Power of Three targets even as it endured an unprecedented pandemic, so inflation and other macroeconomic challenges probably won't prevent it from hitting its new Power of Three x2 goals. Lululemon also plans to open about 75 new stores for the full year, compared to its prior guidance for 70 new openings, as many other apparel retailers shutter their brick-and-mortar stores to rein in their expenses.

Its margins are still stable

Lululemon's gross margin rose sequentially but declined year over year to 56.5% in the second quarter as it dealt with higher airfreight costs. However, its operating margin still improved sequentially and year over year to 21.5% as it reined in its spending to cope with that pressure.

Data source: Lululemon.

For the full year, Lululemon expects its adjusted operating margin to be "approximately flat to up slightly." That stable outlook indicates its margins won't buckle under the pressures of soaring excess inventories or desperate markdowns.

A rosy outlook and a reasonable valuation

Lululemon expects its revenue to rise 25% to 26% for the full year, which would represent a three-year compound annual growth rate of 26% after smoothing out the pandemic and post-pandemic comparisons. It expects its adjusted earnings to grow 25% to 27%.

Based on those expectations and its current price of $314, Lululemon's stock trades at about 32 times this year's earnings. That valuation isn't cheap, but I believe it still looks reasonable relative to its growth rates.

Lululemon's stock got a bit overheated when it closed at its all-time high of $477.91 last November. But now that it's pulled back by more than 30%, I think investors should start accumulating more shares of this "best in breed" player in the high-end athletic apparel market.