This time a year ago, shares of Lululemon Athletica (LULU 1.31%) were trading for something approaching a value for an established but fast-growing athletic wear company. Since then, Lululemon's stock has risen nearly 30%, even as revenue growth has lost a bit of steam. With shares now trading for over 50 times trailing-12-month earnings per share, suffice to say the "value trade" is now gone.
Nevertheless, Lululemon has continued to surprise shareholders with better-than-expected financial numbers, even in the face of heightened competition and weakening consumer spending in the retail space. Is Lululemon stock still a buy?
These gym results are the real deal
First, consider Lululemon's outperformance in the second quarter of 2023. Sales grew 18% year over year to $2.2 billion, about $30 million better than the high end of guidance management provided a few months ago. As a result, full-year 2023 guidance was raised to a range of $9.51 billion to $9.57 billion (previously $9.44 billion to $9.51 billion), implying growth of 17% to 18% over 2022.
To be certain, Lululemon continues to win over fans and is steadily gobbling up market share of the retail space. For comparison, Nike reported just 5% revenue growth (or 8% when excluding currency exchange rate headwinds) in its last quarter, though it will be providing an update at the end of September investors will want to pay attention to.
The caveat to this, though, is that the yoga-wear brand is slowing. Remember that Lululemon revenue had surged 30% in 2022 as the company lapped a period of too little inventory during the pandemic years.
Slowing top-line growth and a rising valuation certainly seems like a recipe for disaster, right?
Data by YCharts.
The real metric to watch
As Lululemon slows from a period of exceptionally fast pandemic-era expansion, investors will want to focus on profitability metrics. This is especially true because Lululemon's profit margin was depressed through early this year from a few effects:
- Elevated inventory purchases in 2022 and early 2023 to replenish its stock following pandemic lockdowns, as well as inventory to support geographic expansion (like in Asia-Pacific, with China sales growing 61% alone last quarter) and new category launches (womens' shoes).
- Inflation-related charges that are now dissipating, including expedited air freight charges in 2021 and 2022.
- A big non-cash writedown expense of $443 million in the fourth quarter of 2022 related to Lululemon's acquisition of home workout start-up Mirror in 2020.
In total, slowing expenses and lapping of the Mirror impairment charge mean Lululemon's earnings per share (EPS) are headed far higher this year and next. EPS guidance for full-year 2023 was just raised to a range of $12.02 to $12.17 (previously $11.74 to $11.94). For the record, Lululemon reported generally accepted accounting principles (GAAP) EPS of just $6.68 in 2022.
Put another way, this stock isn't nearly as expensive as it may appear at first blush. Shares trade for 33 times management's guidance for 2023 EPS, and just 29 times Wall Street analysts' expectations for 2024 EPS.
Granted, this still doesn't make Lululemon "cheap," especially not if sales continue to slow in 2024. And absent another near-doubling in EPS next year like this year, some of the stock price's momentum may stall a bit.
Given this situation, I'm not buying Lululemon in bulk like I was late in 2022. However, this company has certainly established itself as a top brand, and it's still winning share of consumers' wallets with its premium image. For investors looking for a top apparel stock for the long haul, I still think Lululemon shares are a solid buy, utilizing a dollar-cost average plan.
