Lululemon Athletica (LULU 1.31%) recently closed out an impressive fiscal 2022. Despite major supply and cost challenges, the athleisure-wear specialist managed to beat fourth-quarter sales and earnings targets as revenue jumped over 30% year over year. Profitability ticked higher, too, further separating Lululemon from peers such as Nike (NKE 0.19%).
These wins give the company solid momentum heading into fiscal 2023. But even better returns are possible for investors who hold the stock for several years. Let's take a closer look at Lululemon's longer-term prospects.
Finishing strong
Wall Street was worried about Lululemon's holiday season after the company, in mid-January, lowered its short-term profitability outlook. Those concerns were overblown.
Lululemon exceeded management's updated gross profit and earnings projections, revealing in late March that adjusted gross profit fell just slightly to 57.4% of sales. Thanks to cost cuts and efficiencies gained from rising sales, the adjusted operating margin ticked higher, to 28.3% of sales. For context, Nike's comparable figure is roughly 10 percentage points lower.
The company also blew past management's upgraded sales estimate. Revenue jumped 33% in the quarter, thanks to a 29% spike in the U.S. market and 35% better results internationally.
"Our ability to exceed our annual revenue target in a dynamic operating environment is a testament to the enduring strength of the Lululemon brand," CFO Meghan Frank said in a press release.
Cash and profits
The company is entering a potentially challenging fiscal 2023 with plenty of resources at its disposal. There is $1.2 billion of cash on the books as of late January, and operating cash flow over the past year was near $1 billion. Profitability remains above 20% of sales.
LULU Operating Margin (TTM) data by YCharts.
Lululemon took some financial charges associated with the integration of the Mirror brand acquisition, which hasn't paid off as quickly as executives had hoped it would. But management had plenty of resources to direct toward growth initiatives, like store launches and steady stock buyback spending. Lululemon repurchased 1.4 million of its shares in the past year for a total cost of $443 million.
Looking ahead
In characteristic fashion, Lululemon issued a conservative outlook for the new fiscal year ahead. Sales should land between $9.3 billion and $9.4 billion in 2023, translating into growth of about 15%. That expansion pace would be roughly half of the growth rate that shareholders saw in 2022 when revenue jumped 30% to $8.1 billion.
It's no surprise that growth is slowing for a business that's seen its annual sales skyrocket to over $8 billion from $4 billion in 2019. But there are good reasons for investors to be bullish about the long-term growth outlook.
Two specific metrics suggest that Lululemon has a long growth runway ahead. First, international sales rose significantly faster than sales in the U.S. market last year. And second, its direct-to-consumer sales expanded faster than the regular retailing segment. Together, these factors imply annual sales can continue growing toward $10 billion and beyond, even as gross profit margin improves.
Lululemon will have a much higher sales base and earnings potential over time. Therefore, there's a good chance that the company's stock will deliver solid investor returns over the next several years, even if economic volatility pressures the business in 2023.
