Is Lululemon Athletica (LULU) Set to Surge 18%?

Shares of Lululemon Athletica Inc. (LULU) have witnessed continued momentum. Over the past month, the stock has gained 8.7%. Its recent uptrend appears to be the result of a research note issued on November 17 from analysts at Truist Financial, which initiated coverage on LULU shares.

The firm set a “Buy” rating and a $500 price target on LULU stock. This target implies more than 18% upside from the current price level.

Truist Financial likes LULU’s growth profile compared to other retailers in the athletic apparel space. In their coverage of LULU, analysts noted that they “believe Lululemon has some of the strongest brand loyalty in the activewear industry as its direct to consumer model enables it to invest more in product & foster deeper customer relationships.”

This brand loyalty, combined with the retailer’s continued expansion initiatives in several key global markets, could provide significant growth that other retailers may struggle to achieve in the upcoming years.

LULU’s shares have surged more than 13% over the past six months and 30.6% year-to-date to close the last trading session at $422.44. Moreover, the stock is trading above its 50-day and 200-day moving averages of $393.67 and $366.77, respectively, indicating an uptrend.

Now, let’s discuss several factors that could impact LULU’s performance in the upcoming months:

Addition to S&P 500 Index

Inclusion to the S&P 500, the most widely followed benchmark of the U.S. stock market, added to an already winning year for LULU. The Canadian athletic clothing company joined the major equity benchmark before the opening of trading on October 18.

“We look upon the addition of shares to the major index as a potential catalyst for incremental interest and buying,” Oppenheimer analyst Brian Nagel wrote in a note to clients.

Despite prevailing economic uncertainty, higher-income consumers' willingness to keep spending on renowned apparel brands, including Lululemon and Abercrombie & Fitch Co., lifted shares.

Positive Recent Developments

On September 27, LULU and Peloton Interactive, Inc. (PTON) announced a five-year strategic global partnership through which Peloton will become the exclusive digital fitness content provider for Lululemon, and Lululemon will be the primary athletic apparel partner to Peloton.

This multi-dimensional agreement brings together the best in fitness content and athletic apparel to inspire a combined community of more than 20 million members and guests globally. This collaboration will enable Lululemon to enhance its brand awareness, acquire more customers, and generate incremental revenue through PTON’s online channels and physical stores.

On June 6, lululemon and Xponential Fitness, Inc. (XPOF), the largest global franchisor of boutique fitness brands, renewed their partnership, bringing an expanded selection of digital workouts to Lululemon Studio. This collaboration builds upon the success of the initial launch last October and further enhances the distinctive offerings available to Lululemon Studio members.

Robust Financial Performance in the Last Reported Quarter

The athletic apparel retailer reported sales and earnings that surpassed Wall Street’s estimates in the second quarter of fiscal 2023. LULU reported net revenue of $2.21 billion, beating the analysts’ estimate of $2.17 billion. This compared to the revenue of $1.87 billion in the second quarter of 2022.

The company’s sales were fueled by solid growth internationally, including a 61% increase in China. LULU’s CEO Calvin McDonald said e-commerce and in-store sales are performing “incredibly well” in China. The retailer has 107 stores in the country and plans to open nearly 35 stores internationally during the ongoing fiscal year, and the majority will be in the region, McDonald added.

Moreover, lululemon opened ten net new company-operated stores during the second quarter, ending with 672 stores.

LULU’s gross profit grew 23% from the year-ago value to $1.30 billion. Its income from operations rose 19.5% from the year-ago value to $479.26 million. The company’s net income increased 18% from the prior year’s period to $341.60 million. Its earnings per share came in at $2.68, above the consensus estimate of $2.54 and up 18.6% year-over-year.

As of July 30, 2023, the retailer’s cash and cash equivalents stood at $1.11 billion, compared to $498.83 million as of July 31, 2023. Its current assets came in at $3.32 billion versus $2.39 billion as of July 31, 2022. Inventories at the end of the fiscal 2023 second quarter increased 14% to $1.70 billion compared to $1.50 billion at the end of last year’s second quarter.

Upbeat Full-Year 2023 and Long-Term Outlook

“Our performance remained strong in Q2 as both revenue and EPS exceeded our expectations. Our ongoing momentum is a reflection of our portfolio approach to growth, differentiated business model, and innovative product assortment. We are excited about our opportunities in the second half of the year and look forward to continue delivering on our Power of Three ×2 growth plan,” said Meghan Frank, LULU’s Chief Financial Officer.

For the third quarter of fiscal 2023, the retailer expects net revenue to be in the range of $2.165 billion to $2.190 billion, representing growth of approximately 17% to 18%. LULU's earnings per share are anticipated to be in the range of $2.23-$2.28 for the quarter.

For the full year, LULU expects net revenue to be between $9.51-$9.57 billion, representing growth of 17%-18%. This is above the prior guidance of $9.44-$9.51 billion. The apparel retailer's earnings per share are expected to be between $12.02 and $12.17 for the year, compared to the previous range of $11.74 to $11.94.

The company's Power of Three ×2 growth plan suggests a doubling of the business from 2021 net revenue of $6.25 billion to $12.5 billion by 2026. The key pillars of this ambitious plan are product innovation, guest experience, and market expansion. The growth strategy includes a plan to double men’s, double direct-to-consumer, and quadruple international net revenue relative to 2021.

Impressive Historical Growth

LULU’s revenue and EBITDA have grown at respective CAGRs of 31.7% and 36.4% over the past three years. The company’s EBIT has increased 39% over the same timeframe, while its net income and EPS have improved at CAGRs of 23.1% and 24.2%, respectively.

Additionally, over the same period, the company’s total assets have grown at a CAGR of 19.7%, and its levered free cash flow has increased at a 30.9% CAGR.

Favorable Analyst Estimates  

Analysts expect LULU’s revenue to increase 17.8% year-over-year to $2.19 billion for the third quarter ending October 2023. The consensus earnings per share estimate of $2.28 for the ongoing quarter indicates a 14% year-over-year improvement. Moreover, the company has topped the consensus revenue and EPS estimates in all four trailing quarters, which is impressive.

The company’s revenue and EPS for fiscal year (ending January 2024) are expected to grow 18.3% and 20.9% year-over-year to $9.59 billion and $12.17, respectively. For the next year 2025, Street expects LULU’s revenue and EPS to increase 13.4% and 15% from the previous year to $10.88 billion and $14, respectively.

Bottom Line

LULU’s revenue and earnings beat analysts’ expectations in the last reported quarter. The apparel retailer posted solid financial results and raised its full-year 2023 guidance.

CEO Calvin McDonald said, “Our Q2 results highlight the ongoing strength of the business amid a dynamic operating environment. I am proud of how our teams continue to deliver on our vision and offer an exciting pipeline of new products and experiences to our guests around the world. Our continued ability to gain market share and bring new customers into the brand illustrates the significant runway ahead for lululemon.”

The company’s continued business momentum reflects its differentiated business model, a diverse and innovative product assortment, and strategic initiatives to expand its brick-and-mortar footprint.

LULU’s stock is up more than 30% year-to-date and could climb even higher. Despite weakness in the overall apparel market, lululemon had a strong year owing to several factors, including solid financial performance, joining the S&P 500 index, and more.

Given its solid financials, impressive price performance, improving profitability, and optimistic long-term outlook, LULU is an ideal buy now.