In spite of reports of slowing consumer spending and increasing competition in the activewear space, Lululemon Athletica (LULU -1.34%) handed in another stellar report for its first quarter of 2023. Revenue increased 24% year over year to $2 billion. Suffice to say, this is no longer a niche company that provides women's yoga attire.
The shares have rallied 21% over the past year, bucking the bear market and handily beating the 4% gain of the S&P 500 index. But with inflation still eating into consumers' budgets, is Lululemon's valuation stretched to the max right now?
How long can this sprint last?
Even better than Lululemon's 24% revenue increase last quarter was the earnings per share surge, up 54% year over year to $2.28. But is it really sustainable?
Perhaps it is -- for this year, anyway. Bear in mind that Lululemon is still lapping some pandemic-era disruption, including supply chain issues and too-little inventory for customer demand last year. Rebuilding inventory costs money, and much of 2022 was spent restocking stores and warehouses to meet what the people want. Much of that work is now complete.
But Lululemon also has an efficient retail model, employing a limited number of stores (just 662 of them worldwide at the end of April) to provide a touchpoint for its online presence (digital was 42% of total sales in Q1). A massive rebound in business in China (sales there were up 79% year over year) certainly doesn't hurt either. Existing store and e-commerce comparable sales were up 17% last quarter when excluding currency exchange rates. Doing more with assets that have already been built is a great way to boost profitability.
In total, Lululemon is enjoying operating leverage this year. Full-year sales are only expected to increase 15%, implying a sharp slowdown in momentum is coming in the following quarters after that 24% increase in Q1. Nevertheless, earnings per share (EPS) are expected to be in a range of $11.74 to $11.94 -- up some 80% from the $6.68 in EPS generated in 2022 due to these factors.
With that kind of momentum, no wonder the stock trades for a premium. Lululemon's shares are currently valued at about 31 times expected full-year EPS.
Is this apparel stock flying too high?
Of course, buying Lululemon stock now at such a premium would only make sense if you believe growth will continue beyond this year and well into the future. Lululemon itself thinks it can. In April 2022, management outlined plans to double revenue (to $12.5 billion) by 2027, a goal it's currently ahead of schedule in achieving right now.
Expansion with its men's clothing has been a resounding success, as have early victories within women's running shoes. Lululemon has built a large fan base, and it keeps scoring new enthusiasts with its mix of online and in-person events.
However, as lululemon has now lapped its early-pandemic disruption, coaching its financials to sustained double-digit growth might get a bit more difficult going forward. Based on its current valuation and 2023 expected EPS, the market seems to be anticipating an average of 20% earnings growth from 2024 to 2027, and about 6% earnings growth thereafter, to justify the current share price.
Of course, Lululemon's business could certainly turn up the heat once more in 2024 if the global economy rebounds from recession-like performance this year. This company is highly dependent on a healthy consumer, and discretionary shopping in many areas of the world (North America, for example) is showing signs of coming to a screeching halt in 2023 due to two years of inflationary pressure.
At this juncture, though, Lululemon stock appears to be a bit too sweaty from market excitement following the Q1 earnings update. The stock may seesaw the rest of this year unless management delivers further upgrades to its financial guidance.
I'm plenty happy with my current position, but am on hold purchasing any more for now. Given the stock's high valuation and slowing revenue growth this year, investors who think this can remain a growing consumer brand for the long term could be best served using a dollar-cost averaging plan, making small purchases of this top apparel and athleticwear stock monthly or quarterly.
