Lululemon Athletica's (LULU 0.80%) stock jumped 11% on June 2 after it posted its latest earnings report. For the first quarter of fiscal 2023, which ended April 30, the yoga apparel and activewear retailer's revenue rose 24% year over year to $2.0 billion, exceeding analysts' expectations by $80 million. Its net income grew 53% to $290 million, or $2.28 per share, which also cleared the consensus forecast by $0.29.
Those headline numbers were impressive. But even after its post-earnings pop, Lululemon's stock remains 24% below its all-time high of $477.91 in November 2021. I believe this resilient growth stock could easily reach that level again -- possibly even surpass it -- over the following 12 months for seven simple reasons.
Image source: Getty Images.
1. Robust comparable sales growth
Lululemon's comparable sales have consistently climbed by double digits over the past year, in both constant currency and reported terms, even as the inflationary headwinds throttled consumer spending on apparel and other discretionary products.
|
Comparable Sales Growth |
Q1 2022 |
Q2 2022 |
Q3 2022 |
Q4 2022 |
Q1 2023 |
|---|---|---|---|---|---|
|
Constant dollar basis |
29% |
25% |
25% |
30% |
17% |
|
Reported basis |
28% |
23% |
22% |
27% |
14% |
Data source: Lululemon Athletica.
It expects its total revenue to rise 17% in fiscal 2023 (which will end in Jan. 2024), compared to its 30% growth in fiscal 2022. Its growth is cooling off in this tough environment, but it's still one of the market's fastest-growing apparel retailers.
2. Its margins are expanding
Lululemon's gross and operating margins were squeezed by higher supply chain costs, increased markdowns, and currency headwinds throughout fiscal 2022. But in the first quarter of fiscal 2023, both metrics rose sequentially year over year.
|
Metric |
Q1 2022 |
Q2 2022 |
Q3 2022 |
Q4 2022 |
Q1 2023 |
|---|---|---|---|---|---|
|
Gross margin |
53.9% |
56.5% |
55.9% |
55.1% |
57.5% |
|
Operating margin |
16.1% |
21.5% |
19% |
11.3% |
20.1% |
Data source: Lululemon.
That expansion, along with its stable double-digit revenue growth, tells us the macro headwinds are waning and Lululemon hasn't fallen into the trap of using aggressive discounts to drive its sales growth.
3. It's buying back a andes
As Lululemon's sales rise, it's directing a lot of its excess cash into stock buybacks to boost its earnings per share (EPS). The company bought back $444 million in shares in fiscal 2022 and another $98 million in the first quarter of fiscal 2023. Those buybacks were well-timed, as Lululemon's stock has risen more than 20% over the past 12 months.
4. It's still opening new stores
Many struggling apparel retailers shuttered their weaker brick-and-mortar stores to cut costs as their comparable store sales declined. However, Lululemon is bucking that trend by opening new stores to expand its direct-to-consumer channel. It ended the first quarter of fiscal 2023 with 662 stores, compared to 574 at the end of fiscal 2021.
That rising store count should widen its moat against smaller competitors like Gap's Athleta while increasing its overseas presence in higher-growth markets like China. It plans to open about 50 new stores in fiscal 2023.
5. Its growth in China is accelerating
Lululemon said it experienced a "meaningful acceleration" in China, with 79% year-over-year revenue growth during the first quarter as the COVID lockdowns ended and the macro environment improved. During the conference call, CFO Meghan Frank said China would account for the "majority" of its 30 to 35 planned international store openings in fiscal 2023.
6. It reiterated its Power of Three x2 plan
Back in 2019, Lululemon launched its Power of Three plan to double its digital revenue, double its men's revenue, and quadruple its international revenue from its fiscal 2018 levels within the following five years.
After hitting those targets ahead of schedule, Lululemon launched a new Power of Three x2 plan with the same goals last April. Once again, the company plans to double its digital and men's revenue and quadruple its international revenue from fiscal 2021 through fiscal 2026. It expects to nearly double its annual revenue from $6.3 billion in fiscal 2021 to $12.5 billion by fiscal 2026.
Lululemon reiterated its commitment to those goals during its latest earnings report and noted its target for 17% revenue growth this year exceeds the five-year compound annual growth rate (CAGR) of 15% implied by its Power of Three x2 targets.
7. It's still reasonably valued relative to its growth
Lululemon expects its adjusted EPS to grow 11%-19% in fiscal 2023. At $365, its stock trades at 31 times the midpoint of that outlook. By comparison, Nike also trades at 31 times forward earnings, but it's bracing for an earnings decline this year. Gap, which faces a sales decline this year, trades at 14 times forward earnings.
Therefore, I believe Lululemon is still reasonably valued relative to its industry peers and its own growth rates -- and it should climb back toward its all-time high as more investors recognize these strengths.
