It was almost a year ago -- April 2022 -- that Lululemon Athletica (LULU 0.80%) updated its five-year growth plan, dubbed "Power of Three x2." Specifically, management said it wanted to double its sales in five years by doubling revenues from its men's apparel line, doubling its digital business, and quadrupling international sales.
Operating under this plan, the retailer significantly outpaced its forecasts in its fiscal 2022.
That occurred despite big changes over the last year that included persistent inflation, war in Europe, and weakness in consumer discretionary spending. Lululemon powered through, though, and closed out 2022 with exceptional results. This remains a top apparel stock to buy if you're planning to hold onto it for the long term.
Discounting was not a distraction here
Inflation began to deeply impact consumer discretionary spending by the end of 2022. Suddenly stuck with excess inventory, many retailers resorted to heavy discounting during the holiday shopping season to clear out old merchandise. Some Wall Street analysts had a moment of panic when Lululemon slightly altered its guidance partway through the fiscal fourth quarter to reflect a bit of discounting and the effects of a strong run-up in the value of the U.S. dollar versus other currencies.
But the company's Q4 financials, which it delivered on March 28, were exceptional nonetheless, including a 30% year-over-year increase in sales. As a result, full-year 2022 revenue also rose 30% to $8.1 billion, and it was up 32% when excluding the effect of currency exchange rates. In its fiscal fourth quarter, which ended Jan. 29, revenues from its men's lineup increased by 26%, e-commerce sales grew by 46%, and international sales were up 39%, keeping Lululemon ahead of schedule on its "Power of Three x2" goals.
On an adjusted basis, its operating profit margin also increased to 28.3% (versus 27.8% last year). Not bad at all, Lululemon.
An old purchase came back to haunt its financial statements
Of course, that 28.3% operating profit margin was on an adjusted basis. The adjustment was for Mirror. Remember that one? Over the summer of 2020 (when most of us were still on lockdown), Lululemon decided to acquire the home fitness start-up for $500 million. Unfortunately, Mirror wasn't worth it. As a result, Lululemon reported a non-cash impairment charge of $443 million on the acquisition last quarter.
Emphasis on the "non-cash charge" here, since this was money already spent. Basically, Lululemon is stating it overpaid for Mirror by a large amount. Back in 2020, buying a start-up that made digital "mirrors" with embedded cameras that guided you through workouts seemed like a brilliant idea. I'm not judging too much. I also bought stuff in 2020 I wouldn't have under normal circumstances.
At any rate, that's why Lululemon emphasized its adjusted operating margin for the final quarter of 2022, since including the hefty non-cash charge for Mirror lowered its GAAP operating margin to just 11.3%. But now, Lululemon's profitability won't have that acquisition hanging over its head anymore. Mirror has since been rebranded as "Lululemon Studio."
Why shares might still be a buy
For its fiscal 2023, management is predicting around 15% year-over-year revenue growth to a range of $9.3 billion to $9.41 billion. Adjusted earnings per share should be in the range of $11.50 to $11.72, compared to $10.07 per share in 2022. That would amount to adjusted earnings growth of at least 14%.
This certainly would be a slowdown from its 2022 growth rate, but there are still ongoing worries about the state of the global economy and the financial health of the consumer. Or perhaps management is sandbagging a bit and guiding shareholders toward a conservative outlook. Either way, growth is growth, and I'm not complaining given the current state of world affairs.
In the wake of the sizable jump they took after its latest earnings report, shares of this top apparel brand aren't as cheap as they were a couple of months ago. As of this writing, the stock trades for about 31 times expected fiscal 2023 adjusted earnings per share. That's a premium price tag to match Lululemon's premium-priced threads.
Nevertheless, the company continues to deliver on its five-year expansion plan and is clearly winning a growing share of consumer spending on workout and workout-inspired clothing. I don't think this stock is as timely a purchase as it was at the start of 2023. However, for investors looking to buy and hold for at least the next few years, Lululemon stock still ranks as a buy in my book, given its consistent revenue and earnings growth and its ongoing policy of returning cash to shareholders via stock buybacks.
