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.

S&P 500 Addition: Analyzing Whether Lululemon Athletica (LULU) Is a Buy Now

Vancouver, Canada-based athleisure fashion retailer Lululemon Athletica Inc. (LULU) is set to join the S&P 500 index on October 18, replacing video-game company Activision Blizzard Inc., which Microsoft Corp. (MSFT) recently acquired for $68.7 billion after crossing numerous regulatory hurdles. The announcement was greeted with a more than 10% surge in LULU's shares.

Historically, the news of inclusion in the S&P 500 positively impacted stocks, usually driven by increased liquidity and heightened interest from individual and institutional investors.

Let’s look into the investment cases for the activewear giant’s shares.

Boasting a market cap of over $50 billion, LULU continues its stride amid the turbulence rattling the broader apparel industry. The company has leveraged the pandemic-driven trend of home exercising, acquiring smart fitness platform Mirror for $500 million to tap into the flourishing at-home fitness sector. This acquisition was intended to fuel further purchases of LULU clothing.

However, this landmark M&A transaction faced obstacles in its course. As pandemic restrictions eased globally, a rush toward gyms and fitness studios saw Mirror struggling to retain users. Consequently, LULU had to write down the value of Mirror to a mere $58 million, even considering its sale. By year-end, LULU intends to discontinue the sales of Lululemon Studio Mirror, though service and support will continue for existing customers.

The company underwent a branding exercise, re-emphasizing its product as Lululemon Studio, shifting the attention toward Mirror’s subscription app instead of the hardware device. Despite the setbacks faced by Mirror, LULU’s agility in course-correcting failures speaks volumes of its ability to manage risks, propelling itself into becoming not just a top sportswear brand but also making its debut on the Fortune 500 list.

Recognizing a post-pandemic shift in the fitness industry, LULU has forged a strategic five-year partnership with connected exercise bike manufacturer Peloton Interactive (PTON). This alliance positions LULU as Peloton's leading athletic apparel partner, with select PTON instructors serving as LULU’s brand ambassadors.

However, industry analysts voiced skepticism about the potential marketing benefits, indicating that many PTON users may already be buyers of LULU products. Regardless, the partnership presents evident synergies and opportunities for joint promotion, expected to arise from exclusive product offerings and extended services across both brands, and the advantages attributed to increased scale and reach.

In addition to bike sales, PTON has demonstrated prowess in content creation, live streaming, and launching innovative classes, setting itself apart in the industry. The burgeoning collaboration with PTON bodes well for LULU as it continues to invest in its Studio platform.

LULU's reputation as a fashion retailer catering to affluent consumers has been instrumental in fueling its growth, pointing to its contribution to the conception of the “athleisure” trend, combining fit and high-quality fabric. The company’s gradual expansion into menswear and the recent foray into golf and hiking attire is noteworthy.

Moreover, its experimental approach and avoidance of “analysis paralysis” – an issue that has slowed down many retailers' adaptability to new consumer preferences – have significantly contributed to LULU’s success.

Despite industry-wide challenges, LULU experienced robust growth so far. Its home base, Canada, alongside the U.S., accounted for 78% of its revenue in the second quarter of 2023. During this quarter, the company opened 10 new company-operated stores, totaling 672 stores worldwide.

It also anticipates considerable growth opportunities internationally, particularly in the U.K. and China. LULU is poised to quadruple its international sales, buoyed by remarkable growth in the Chinese market. In the second quarter of 2023, LULU saw a 52% year-over-year increase in global sales. As of July 30, 2023, the company operated 126 stores in China, producing 12.6% of total sales, and Chinese sales spiked 61.3% year-over-year, supported by stable demand after relaxed pandemic restrictions.

LULU’s second-quarter results surpassed Wall Street's forecasts, with net revenue and net income climbing 18.2% and 18% year-over-year, respectively.

Growing Institutional Ownership

LULU’s robust financial health and fundamental solidity make it a compelling investment prospect for institutional investors. Notably, several institutions have recently modified their LULU stock holdings.

Institutions hold roughly 87.5% of LULU shares. Of the 1,173 institutional holders, 489 have increased their positions in the stock. Moreover, 124 institutions have taken new positions (972,619 shares).


LULU recently said that it was "off to a solid start" as the North American business improved, which led to an upward revision of its annual revenue and profit projections for the second time this year.

The athleisure wear producer is forecasting its revenue for 2023 to be between $9.51 billion and $9.57 billion, up from the previous projection of $9.44 billion and $9.51 billion. Simultaneously, an anticipated increase in profit is forecasted between $12.02 and $12.17 per share for the same fiscal year.

Stepping into the third quarter of 2023, LULU projects its net revenues between $2.17 billion and $2.19 billion, representing 17% to 18% growth. Earnings per share are expected to be between $2.23 to $2.28 for the quarter.

Furthermore, Lululemon unveiled its strategic aspirations under the Power of Three x 2 growth plan. To fortify its position in the global market, the company desires to multiply its business twofold – soaring from the 2021 net revenue of $6.25 billion to $12.5 billion by 2026.

The cornerstones guiding this ambitious growth map comprise product innovation, unprecedented guest experience, and wide-ranging market expansion. A distinct strategy underlining this objective is to double the revenue flow from men's wear and direct-to-consumer sales and to quadruple the international net revenue compared to figures from 2021.

Analysts expect its revenue and EPS for the fiscal third quarter ending October 2023 to increase 17.8% and 14.2% year-over-year to $2.19 billion and $2.28, respectively.

Bottom Line

LULU continues its journey toward becoming a global brand, displaying strong potential to rival industry heavyweights like Nike, Inc. (NKE) in the long run. This could be traced back to its impressive performance in recent quarters, consistently outperforming Wall Street's profit expectations.

This demonstrates solid fundamental business strength, a strong consumer base, and exemplary operational execution across all corporate levels.

Historically, LULU has been an excellent performer in the stock market. However, following a recent upsurge, its shares now command an even steeper premium. Its shares currently trade at a forward non-GAAP P/E of 34.23x, a 144.2% premium to the industry average of 14.02x.

Despite the increasingly challenging business backdrop, LULU maintains sturdy growth, evident in its recent quarterly report. Yet, considering the current circumstances of high inflation, there is the possibility that the sustained pressure on consumer spending will eventually take its toll on LULU.

Procuring stock at such a premium would only be justifiable because LULU's growth will persevere beyond this financial year and into the foreseeable future.

However, given the broader macroeconomic environment, investors may want to exercise caution and wait for a better entry point.

Should Investors Buy Into the Recent Lululemon Athletica (LULU) Hype

The month began with athletic apparel retailer lululemon athletica inc. (LULU) reporting its earnings for the first quarter of the fiscal year 2023. The company surpassed both top-line and bottom-line expectations to take the Street by pleasant surprise. Its revenue jumped 24% year-over-year to $2 billion, while its earnings per share came in at $2.28.

While decades-high inflation and increased borrowing costs instituted to rein it in have been weighing heavily on consumers’ budgets and forcing middle-income consumers to trade down the value chain to budget-friendlier options, high-income segments have been relatively unaffected.

Hence, LULU, which sells high-end yoga pants, shoes, and other athletic wear, said it had seen no changes in its customers’ shopping habits. In fact, despite raising its prices around this time last year, the retailer still found shoppers flocking to its stores and filling up their digital carts. This led to 13% and 16% year-over-year increases in comparable store sales and direct-to-consumer net revenue, respectively.

According to CFO Meghan Frank, LULU has also been helped by lower air freight costs and the reopening of the Chinese economy, as the revenue from the country alone grew by 79% from the previous-year period when about a third of its 71 stores there were closed due to strict restrictions under its “Zero-Covid” policy.

As a result, LULU’s gross margins increased 3.6 percentage points to 57.5% in the quarter, above the 56.7% analysts had been expecting. The company’s stellar performance has encouraged it to expect its second-quarter sales to be in the range of $2.14 billion to $2.17 billion, representing growth of about 15%, and diluted earnings per share to be in the range of $2.47 to $2.52 for the period.

For the full year, LULU has raised its guidance. The company expects its revenue to be in the range of $9.44 billion to $9.51 billion, up from a previous range of $9.31 billion and $9.41 billion. Also, it expects EPS to be $11.74 to $11.94 compared to the earlier estimate of $11.50 to $11.72.
Moreover, it expects to open 50 net new company-operated stores in the fiscal year, with a majority of 30 to 35 planned for international markets expected to open in China.

The bullish outlook was promptly reflected in the price action, with the stock surging by more than 12% in extended trading after the earnings release.

Our Take

Notwithstanding LULU’s bullishness regarding its prospects, retailers across the industry have cited a pullback in discretionary spending and higher-ticket items. In fact, during the earnings call of Nordstrom, Inc. (JWN), its executives noted that although the high-end customer is “pretty resilient,” they’ve also become more cautious.

Secondly, with the $500 million acquisition of Mirror in June 2020, fueled by misplaced expectations that people would continue to exercise at home, even after Covid pandemic restrictions ended and gyms reopened, turning out to be a dud, LULU’s at-home fitness business is in jeopardy.

While the company has approached its competitor, Hydrow as a potential buyer for Mirror, it has since incurred $443 million in impairment charges and has rebranded its at-home fitness business as Lululemon Studio. The segment has also pivoted from being solely hardware-focused to launching a new digital app that gives its members access to its fitness classes without needing to buy its hardware.

Lastly, but perhaps most importantly, as mentioned earlier, sales growth in China over a small base during the previous year-period due to strict public-health restrictions has been responsible for LULU’s recent outperformance. Achieving a similar growth rate this time around will be challenging in an economy whose faltering recovery is evident from the 7.5% year-over-year decline in exports in May.

More ominously, for a company whose primary target segment is the young and upwardly mobile, China is facing a demographic decline. Moreover, high competition and a grueling “996” work culture have been giving rise to countercultural trends such as “tang ping” (lying flat in Chinese) and “bai lan” (let it rot) while driving an ever-increasing switch from a white-collar job to “qing ti li huo” (or light labor in Chinese).

Bottom Line

While the momentum of LULU that is expected to sustain itself in the second quarter could help traders make quick money by the time the company’s next earnings release is due, seldom, if at all, has big money been made by investors buying what is hot on the Street.