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.

Wall Street's D-Day on Sept. 13 Brings High Stakes – 5 Stocks to Consider in the Aftermath

August’s Consumer Price Index (CPI) report, due to be released on September 13, 2023, holds immense significance as it will influence the Federal Reserve’s upcoming policy decision. The Fed’s decision on raising interest rates at the next FOMC meeting scheduled on September 19-20, 2023, could be a significant determinant of the market movement.

August’s CPI figures are important, especially after a surprising rise in prices in July, with the headline CPI rising 3.2% year-over-year, the first acceleration in more than twelve months. August’s inflation numbers would offer insight into whether inflation is easing and July’s rise in prices was a one-off.

The central bank had last raised rates by 25 basis points in late July, pushing the benchmark interest rate to the 5.25% - 5.50% range. The recent economic data has been mixed with the U.S. consumer spending in July rising the most in six months, and nonfarm payrolls increased by 187,000 in August.

However, the unemployment rate rose 3.8% in August, the highest since February 2022. Additionally, job openings edged down to 8.8 million, falling to their lowest level since March 2021. Towards the end of last month, Fed Chair Jerome Powell said that inflation is still too high and could require additional interest rate increases. However, he noted that policymakers would carefully proceed as they assess the incoming data.

A rise in energy prices is expected to have driven the increase in headline inflation last month. Economists forecast headline inflation to rise 3.6% year-over-year and 0.6% sequentially in August. Federal Reserve governor Christopher Waller said he currently sees nothing that would force the Fed to raise the short-term borrowing rates again.

In an interview with CNBC, he stated, “The biggest thing is just inflation. We got two good reports in a row.” The key now is to “see whether this low inflation is a trend or if it was just an outlier or a fluke.”

When asked if rate increases can stop, Waller said, “That depends on the data.” “We have to wait and see if this inflation trend is continuing. We’ve been burned twice before. In 2021, we saw it coming down, and then it shot up. The end of 2022, we saw it coming down, then it all got revised away.”

“So, I want to be very careful about saying we’ve kind of done the job on inflation until we see a couple of months continuing along this trajectory before I say we’re done doing anything,” he added.

The CME FedWatch Tool indicated a 93% probability of the Fed keeping interest rates unchanged in September, while there is just a 53.5% probability for another pause at the November meeting.

Usually, interest rates and the stock market have an inverse relationship. If the prices rise higher than expected in August, the Fed might be compelled to raise interest rates, which could hurt the performance of stocks. In this scenario, investors may consider investing in stocks that are less sensitive to inflation, such as Unilever PLC (UL), Dominion Energy, Inc. (D), and Thermo Fisher Scientific Inc. (TMO).

On the other hand, if inflation shows signs of easing in August, the Fed may keep the benchmark interest rate steady. This could help stock prices to rise. In this scenario, investors may consider investing in cyclical names like Microsoft Corporation (MSFT) and NIKE, Inc. (NKE). They are deemed cyclical due to their sensitivity to rising interest rates. Without rate increases, these stocks are likely to perform well.

Let’s discuss these stocks in detail.

Microsoft Corporation (MSFT)

MSFT develops, licenses, and supports software, services, devices, and solutions worldwide. The company operates in three segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.

On April 17, 2023, MSFT and Epic announced the expansion of their strategic collaboration to develop and integrate generative AI into healthcare by combining the scale and power of Azure OpenAI Service with Epic’s electronic health record (EHR) software.

MSFT’s corporate vice president of AI platform, Eric Boyd, said, “Our expanded partnership builds on a long history of collaboration between Microsoft, Nuance, and Epic, including our work to help healthcare organizations migrate their Epic environments to Azure. Together, we can help providers deliver significant clinical and business outcomes leveraging the power of the Microsoft Cloud and Epic.”

MSFT’s revenue grew at a CAGR of 14% over the past three years. Its net income grew at a CAGR of 17.8% over the past three years. In addition, its EBIT grew at a CAGR of 18.7% in the same time frame.

In terms of trailing-12-month gross profit margin, MSFT’s 68.92% is 43% higher than the 48.20% industry average. Likewise, its 48.14% trailing-12-month EBITDA margin is 432.7% higher than the industry average of 9.04%. Furthermore, the stock’s trailing-12-month Capex/Sales came in at 13.26%, compared to the industry average of 2.42%.

MSFT’s total revenue increased 8.3% year-over-year to $56.19 billion for the fourth quarter ended June 30, 2023. Its net cash from operations increased 16.8% year-over-year to $28.77 billion. The company’s net income increased 20% year-over-year to $20.08 billion. Also, its EPS came in at $2.69, representing an increase of 20.6% year-over-year.

Analysts expect MSFT’s EPS and revenue for the quarter ending September 30, 2023, to increase 12.5% and 8.8% year-over-year to $2.64 and $54.51 billion, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. The stock has gained 39.4% year-to-date to close the last trading session at $334.27.

Thermo Fisher Scientific Inc. (TMO)

TMO provides life sciences solutions, analytical instruments, specialty diagnostics, and laboratory products, and biopharma services.

On August 14, 2023, TMO announced the completion of the acquisition of CorEvitas, LLC, a provider of regulatory-grade, real-world evidence for approved medical treatments and therapies, from Audax Private Equity.

TMO’s Chairman, President, and CEO Marc N. Casper said, “CorEvitas expands our clinical research business with highly complementary real-world evidence solutions, which is an increasingly important area and will help to enhance decision-making as well as the time and cost of drug development.”

“We are excited by the opportunity to further accelerate innovation and advance productivity for our pharma and biotech customers in their new work to deliver new medicines and therapeutics to benefit patients,” he added.

TMO’s revenue grew at a CAGR of 18.4% over the past three years. Its net income grew at a CAGR of 15.6% over the past three years. In addition, its EBITDA grew at a CAGR of 15.5% in the same time frame.

In terms of trailing-12-month net income margin, TMO’s 13.14% compares to the negative 5.71% industry average. Likewise, its 24.43% trailing-12-month EBITDA margin is 373.9% higher than the industry average of 5.15%. Furthermore, the stock’s 10.09% trailing-12-month levered FCF margin is significantly higher than the industry average of 0.23%.

For the fiscal second quarter ended July 1, 2023, TMO’s revenues declined 2.6% year-over-year to $10.69 billion. Its adjusted operating income decreased 9% over the prior year quarter to $2.37 billion. The company’s adjusted net income declined 8% year-over-year to $2 billion.

Also, its adjusted EPS came in at $5.15, representing a decline of 6.5% year-over-year. On the other hand, its non-GAAP free cash flow rose 21.9% year-over-year to $1.26 billion.

Street expects its EPS and revenue for the quarter ending September 30, 2023, to increase 11.5% and 0.5% year-over-year to $5.66 and $10.73 billion, respectively. Over the past three months, the stock has gained 0.6% to close the last trading session at $518.27.

NIKE, Inc. (NKE)

NKE is engaged in the designing, marketing, and distributing athletic footwear, apparel, equipment, and accessories for sports and fitness activities. Its brand product offerings are in Running, Basketball, the Jordan brand, Football, Training, and Sportswear.

Over the last three years, NKE’s revenue grew at an 11.1% CAGR, while its EPS grew at a 26.4% CAGR during the same time frame. Its net income grew at a 25.9% CAGR over the past three years.

In terms of trailing-12-month gross profit margin, NKE’s 43.52% is 22.8% higher than the 35.45% industry average. Likewise, its 11.55% trailing-12-month EBIT margin is 58.7% higher than the industry average of 7.28%. Furthermore, the stock’s 7.56% trailing-12-month levered FCF margin is 49% higher than the industry average of 5.08%.

NKE’s revenues for the fourth quarter ended May 31, 2023, increased 4.8% year-over-year to $12.83 billion. Its gross profit increased 1.7% year-over-year to $5.60 billion. The company’s net income declined 28.4% year-over-year to $1.03 billion. In addition, its EPS came in at $0.66, representing a decline of 26.7% year-over-year.

Analysts expect NKE’s revenue for the quarter ended August 31, 2023, to increase 2.5% year-over-year to $13 billion. Its EPS for the same quarter is expected to decline 19.3% year-over-year to $0.75. It surpassed consensus EPS estimates in three of the trailing four quarters. Over the past three months, the stock has declined 8% to close the last trading session at $97.67.

Unilever PLC (UL)

UL is based in London, the United Kingdom. It operates as a fast-moving consumer goods company. Its segments include Beauty & Wellbeing, Personal Care, Home Care, Nutrition, and Ice Cream.

UL’s revenue grew at a CAGR of 5.7% over the past three years. Its net income grew at a CAGR of 12% over the past three years. In addition, its EPS grew at a CAGR of 13.2% in the same time frame.

In terms of the trailing-12-month EBIT margin, UL’s 16.32% is 106.7% higher than the 7.89% industry average. Likewise, its 18.29% trailing-12-month EBITDA margin is 60% higher than the industry average of 11.43%. Furthermore, the stock’s 42.06% trailing-12-month Return on Common Equity is 273% higher than the industry average of 11.28%.

UL’s turnover for the first half ended June 30, 2023, increased 2.7% year-over-year to €30.43 billion ($32.55 billion). Its operating profit rose 22.6% year-over-year to €5.52 billion ($5.90 billion). The company’s net profit increased 20.7% year-over-year to €3.88 billion ($4.15 billion). Also, its EPS came in at €1.40, representing an increase of 23.6% year-over-year.

In addition, its net cash flow from operating activities increased 10.4% over the prior-year period to €3.37 billion ($3.61 billion).

For the quarter ending September 30, 2023, UL’s revenue is expected to increase 4.7% year-over-year to $16.53 billion. Its EPS for fiscal 2023 is expected to increase 4.9% year-over-year to $2.89. Over the past year, the stock has gained 12.2% to close the last trading session at $50.45.

Dominion Energy, Inc. (D)

D produces and distributes energy in the United States. It operates through four segments: Dominion Energy Virginia, Gas Distribution, Dominion Energy South Carolina, and Contracted assets.

On September 5, 2023, D announced that it concluded a robust and competitive sale process and executed three separate definitive agreements to sell its three natural gas distribution companies to Enbridge (ENB). The three LDCs include The East Ohio Gas Company, Public Service Company of North Carolina, Incorporated, Questar Gas Company, and Wexpro Company.

D's Chair, President, and CEO, Robert M. Blue, said, “The transactions announcement also represents another significant step in our business review, which is focused on repositioning the company to create maximum long-term value for shareholders, employees, customers, and other stakeholders.”

D’s net income grew at a CAGR of 62.4% over the past three years. Its EBITDA grew at a CAGR of 3.5% over the past three years. In addition, its EPS grew at a CAGR of 69.4% in the same time frame.

In terms of the trailing-12-month gross profit margin, D’s 46.31% is 19.2% higher than the 38.86% industry average. Likewise, its 45.90% trailing-12-month EBITDA margin is 40.2% higher than the industry average of 32.74%. Furthermore, the stock’s 50.59% trailing-12-month Capex/Sales is 73.2% higher than the industry average of 29.20%.

For the fiscal second quarter ended June 30, 2023, D’s operating revenue increased 5.5% year-over-year to $3.79 billion. Its adjustments to reported loss came in at $131 million, compared to adjustments to reported earnings of $1.11 billion. Its reported income per common share came in at $0.69, compared to a reported loss per common share of $0.58 in the prior-year quarter.

Street expects D’s revenue for the quarter ending September 30, 2023, to increase 3.4% year-over-year to $4.53 billion. On the other hand, its EPS for the same quarter is expected to decline 32.6% year-over-year to $0.79. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past month, the stock has declined 4.4% to close the last trading session at $47.12.

The Role of China in the Global Stock Market and Its Impact on Investors

Towards the end of last year, China surprised the world with an abrupt pivot away from the strict restrictions of its long-espoused “Zero-Covid” policy., including quarantine requirements for inbound visitors. Despite an initial surge in infections, global businesses rushed in, hoping to cash in on the economic recovery.

Sentiments were further boosted by steps to stimulate economic growth and domestic consumption, mapped during and around the annual Central Economic Work Conference. These steps also helped ailing Chinese developers ease their liquidity strains and revive home purchases.

These measures seem to be working. According to the data released by China’s National Bureau of Statistics on April 18, the country’s GDP grew by 4.5% in the first quarter of the fiscal year. This was better than the forecast of 4% and the highest growth since the first quarter of last year.

Six months on, while the country is still open for business, the momentum has visibly slowed. While China’s exports in April grew by 8.5%, the country’s imports declined by 7.9% year-over-year as growth in the service sector softened, and manufacturing contracted again in three months.

With the 50-mark separating growth and contraction, the Caixin/S&P Global services purchasing managers’ index fell to 56.4 in April from 57.8 in the previous month, and the Caixin China general manufacturing purchasing managers’ index fell to 49.5 in April.

China’s top leaders have also taken note. A translated state media readout of the Plitburo meeting said, “At present the positive turn in China’s economy is primarily one of a recovery. Internal drivers still aren’t strong, and demand is still insufficient.”

As a result of this patchy growth, analysts at Morgan Stanley foresee a significant dip in demand and output of Chinese steel that could result in a 28% decline in iron ore prices by the end of 2023.

With markets mirroring this moderation, Citi has pushed back its stock rebound forecasts, and its analysts expect Hang Seng to take until the end of September to reach 24,000. Continue reading "The Role of China in the Global Stock Market and Its Impact on Investors"

Today's Top 3 Drifting Stocks

It has been a reasonably strong earnings season. Despite growing nervousness on Wall Street, companies are putting forward good revenue numbers reflecting the robust recovery and positive forward guidance.

All but one of the Dow 30 companies beat analysts' estimates this summer earnings season.

Dow Earnings Beats & Misses for Summer Season

The Boeing Company (BA) was one of this season's biggest surprises for the Dow 30. Analysts forecasted -$0.65/share. However, the company reported $0.40/share, 161% over the analysts' forecasts. Management pointed to higher commercial airplane deliveries and lower period costs. Continue reading "Today's Top 3 Drifting Stocks"