The busiest part of earnings season may be past, but there are still businesses that are reporting fresh financials. One such company, which had been experiencing strong momentum, just issued an update that disappointed shareholders.
I'm talking about Lululemon Athletica (LULU 1.31%). While it beat Wall Street's earnings and revenue estimates, investors weren't pleased with some other data points. The top apparel stock was down 16% the day after the announcement, and it has dropped around 20% year to date (as of this writing). That seriously lags the 9% gain of the Nasdaq Composite.
Zoom in
For the three-month period that ended Jan. 28, which was Lululemon's fiscal 2023 fourth quarter, the business reported revenue of $3.2 billion (up 16% year over year) and diluted earnings per share (EPS) of $5.29 (up 20% when adjusting for the impairment charge a year ago). If this was all the information Lululemon provided, you'd assume that the company was firing on all cylinders. These headline figures exceeded Wall Street expectations.
However, investors were disappointed with some notable trends. For starters, sales in the Americas region increased by 9% in Q4. That was compared to 29% growth in the year-ago period, when it was called the North America segment.
"As you've heard from others in our industry, there has been a shift in the US consumer behavior of late, and we're navigating what has been a slower start to the year in this market," CEO Calvin McDonald said on the fourth-quarter 2023 earnings call.
Adding more negativity to the mix, the forecast executives provided also fell short of consensus analyst estimates. Projected net sales of $2.2 billion and diluted EPS of $2.40 (both the high end of guidance) in the current quarter weren't well received by the market.
Zoom out
It's easy to get caught up with the latest financial results. But for long-term investors, there's rarely anything that happens in a three-month period that alters the intrinsic value of a business. With that in mind, I believe Lululemon is still a high-quality enterprise. Same-store sales increased 12%, an encouraging sign.
Management is still focused on growth objectives, opening 25 net new stores in Q4. There's a ton of potential in international markets, where revenue soared 54%. And in China, where Lululemon has 127 stores, sales jumped an impressive 78%.
Don't ignore the financial prowess of Lululemon. For all of fiscal 2023, the gross margin and operating margin came in at 58.3% and 22.2%, respectively. These metrics demonstrate just how profitable the company is.
To be fair, competition remains a key factor to watch. Lululemon has historically reported faster growth and better margins than its biggest rival, Nike. But there are many other under-the-radar competitors that are resonating with consumers.
The economic picture will ebb and flow. That's outside of Lululemon's control. But the business still put up solid Q4 numbers. As long as the company remains focused on its premium brand status and innovative product offerings, I believe it should do fine.
The pitch
Even before the stock took a hit, it wasn't that expensive. But now, shares are much more attractively priced, trading at a forward price-to-earnings ratio of 28.3. This is a slight premium to Nike.
However, it's very easy to argue that Lululemon's return going forward will crush its bigger foe. Lululemon has far greater growth potential, particularly internationally, while Nike is already an established player. Lululemon is also just scratching the surface of the men's category, which has provided a nice boost to sales up to this point.
I also previously touched on Lululemon's better margins. There's a high probability that its EPS will rise by the mid-teens for the foreseeable future. That would mark a slowdown from previous years, but it could undoubtedly propel the stock price.
This makes Lululemon a magnificent growth stock to buy right now on the dip.
