LULU With Nobias Technology: Case Study on Lululemon after their Earnings release
Throughout much of 2022, the apparel space has suffered. The negative share price performance that top names in this space have produced on a year-to-date basis have been largely due to fears surrounding supply chain headwinds which are causing problems for inventories as well as shipping costs. To meet Q4 demand, retailers and apparel stocks have had to do things like commission air freight to meet holiday season shopping demand. Doing so has damaged margins. Furthermore, recent COVID-19 spikes in Asia have created more uncertainty with regard to production of goods and if there’s one thing Wall Street hates, it’s uncertainty. However, over the last month or so, we’ve seen a stark turnaround when it comes to the sentiment surrounding this area of the market.
For instance, Lululemon (LULU) shares are up roughly 24.5% during the trailing month, having bounced off of their mid-March lows in the $290 area to the $370 level where shares sit today. The fourth quarter earnings results that LULU posted on March 29th have factored into the latest leg of this bull run. And, looking at the opinions expressed by the credible authors and Wall Street analysts that the Nobias algorithm tracks, it appears that LULU’s rally has more room to run.
On March 29th, LULU posted results which matched analyst consensus estimates on the top-line and beat Wall Street’s expectations on the bottom-line. LULU’s Q4 revenue totaled $2.13 billion, which was in-line with estimates and represented year-over-year growth of 23.1%. LULU’s Q4 non-GAAP earnings-per-share came in at $3.37, beating consensus estimates by $0.10/share, and representing 30.6% y/y growth compared to 2020’s Q4 EPS result of $2.58. LULU noted that total comparable sales rose by 22% during Q4. The company’s sale-store-sales were up by 32% during the quarter.
LULU April 2022
The company’s earnings report stated, ‘Gross profit increased 22% to $1.2 billion, and gross margin decreased 50 basis points to 58.1%.” LULU also noted that, “Operating margin increased 120 basis points to 27.7%. Adjusted operating margin increased 90 basis points to 27.8%.” And, with those rising margins in mind, LULU said, “Income from operations increased 29% to $590.6 million. Adjusted income from operations increased 27% to $592.0 million.” For the full-year, LULU’s revenues totaled $6.3 billion, up 42% year-over-year.
With regard to full-year profits, LULU said, “Income from operations increased 63% to $1.3 billion. Adjusted income from operations increased 62% to $1.4 billion”. LULU touched on plans to use the rising profits to reward shareholders, announcing a stock buyback authorization of $1 billion during the quarter. The company’s CEO, Calvin McDonald, was quoted during the Q4 report saying: "2021 was another successful year for lululemon, which speaks to the enduring strength of our brand and our ability to deliver sustained growth across the business. We are proud that we passed the $6 billion in annual revenue milestone for the first time, and successfully achieved our Power of Three growth target ahead of schedule. This was especially impressive given the challenging macro backdrop. We are entering the new year from a position of strength, which we’ll build upon to continue delivering for our guests and shareholders in the years to come." The company’s rising profits, alongside management’s confidence, appears to have set the stage for a strong post-earnings rally; LULU shares bounced roughly 7% on the Q4 results.
After LULU’s recent rally, in a recent article published at Nasdaq.com, John Ballard, a Nobias 4-star rated author, notes that “The stock is currently down 4.8% year to date, outperforming the Nasdaq Composite that is down 8.2%.” At a high level, Ballard provided a history lesson on LULU shares saying: “Lululemon has been a tremendous success story since its founding with a single selling space in a yoga studio in Vancouver more than 20 years ago. It continues to gradually expand its store footprint, opening 22 new stores last quarter across Asia Pacific, North America, and Europe, bringing the total to 574 worldwide. It also has a strong online presence that generated 49% of total revenue last quarter.”
Today, LULU sports a $48.5 billion market cap, showing the company’s massive success in recent years (LULU shares are up 647.95% during the past 5 years alone). Ballard highlighted Lululemon’s ongoing innovation, pointings towards the company’s recent entry into the athletic footwear market as a potential long-term growth tailwind for the stock. He wrote, “Lululemon introduced its new women's footwear line called Blissfeel in early March. While it's still early, management reported that the guest response has exceeded their expectations.” Ballard continued, “By going after the women's market first, with a men's shoe scheduled to launch in 2023, Lululemon believes it has an opportunity to make a big splash in this competitive market.”
In his piece, Ballard quoted LULU’s Chief Product Officer, Sun Choe, who touched upon the company’s goals to take market share in an area of the market where the company believes consumers are underserved, saying, "We intentionally started with women first because we saw an opportunity to solve for the fact that, more often than not, performance shoes are designed for men and then adapted for women.” Regarding upside potential, Ballard said, “Overall, Lululemon is a tiny $6 billion brand operating in an athletic wear industry that generates nearly $200 billion in annual revenue.”
Overall, Ballard concluded his bullish piece saying: “Lululemon is a relatively low-risk investment with big return potential. It has proven itself for 20 years with steady growth, and most importantly, the brand is showing universal appeal as it expands everywhere from China to Europe. Investors who buy and hold this retail stock should beat the market's average return soundly over the next 20 years.”
Brian Himes, a Nobias 5-star rated author, published an article at The Stock Observer on 4/2/2022 showing that Ballard isn’t alone with his bullish opinion of LULU shares. Himes said, “Lululemon Athletica had its price objective lifted by Robert W. Baird from $425.00 to $450.00 in a research report released on Wednesday.” He continued, putting a spotlight on a slew of recent analyst price target changes. Many of the analysts that he covers recently lowered their price targets; however, their fair value estimates still point towards strong upside from LULU’s current $370.36 price tag.
Himes wrote:
JPMorgan Chase & Co. lowered their target price on shares of Lululemon Athletica from $518.00 to $450.00 in a research note on Tuesday, January 11th.
Morgan Stanley lowered their target price on shares of Lululemon Athletica from $404.00 to $300.00 and set an equal weight rating on the stock in a research note on Tuesday, January 11th.Deutsche Bank Aktiengesellschaft lowered their target price on shares of Lululemon Athletica from $453.00 to $410.00 and set a buy rating on the stock in a research note on Thursday, March 24th.
B. Riley decreased their price objective on shares of Lululemon Athletica from $548.00 to $487.00 in a research note on Friday, January 7th.
Wells Fargo & Company upped their price objective on shares of Lululemon Athletica from $410.00 to $420.00 and gave the stock an equal weight rating in a research note on Friday, December 10th.
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Overall, Himes said, “One analyst has rated the stock with a sell rating, seven have given a hold rating and nineteen have issued a buy rating to the stock. Based on data from MarketBeat, the stock presently has an average rating of Buy and an average price target of $435.28.”
Looking at the credible analysts that the Nobias algorithm tracks (just those with 4 and 5-star ratings) we’ve seen 8 individuals update their LULU price targets since Lululemon’s recent fourth quarter results. The average price target of those credible analysts is $449.37.
When looking at price targets established both before and after LULU’s recent quarterly results, we see an average price target of $460.80 being applied to LULU shares by Nobias credible analysts. Relative to LULU’s current share price, that average price target represents upside potential of approximately 24.4%.
And, it’s not just credible Wall Street analysts who are bullish here. 88% of recent articles published by the credible authors (once again, only individuals with 4 and 5-star Nobias ratings) have included a “Bullish” bias rating.
Disclosure: Nicholas Ward has no LULU position. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.