Case Study: Lululemon (LULU) stock according to high performing analysts
Key Points
Performance
LULU shares rose by 0.28% this week, pushing their year-to-date gains up to 11.45%. This compares poorly to the S&P 500 which is up by 12.41% on a year-to-date basis.
Event & Impact
Lululemon posted its first quarter results last week, beating analyst consensus estimates on both the top and bottom lines. During Q1, LULU’s revenue totaled $2.0 billion, beating Wall Street’s consensus estimate by $80 million. Lululemon’s Q1 non-GAAP earnings per share came in at $2.28, which was $0.29/share above consensus estimates.
Noteworthy News:
Several other athletic apparel/footwear stocks, including Nike and Footlocker, struggled during the first quarter, largely due to inventory issues and ongoing macroeconomic uncertainty. However, when LULU posted its first quarter results, the stock exceeded expectations, posting strong results and offering full-year guidance that called for 15% sales growth.
Nobias Insights
85% of recent articles published by credible authors focused on LULU shares offer a “bullish” bias. Four out of the five credible Wall Street analysts who cover Lululemon believe that shares are likely to rise in value. The average price target applied to LULU by these credible analysts is $430.00, implying an upside potential of 19.3% relative to the stock’s current share price of $360.40
Bullish Take Harrison Miller, a Nobias 4-star rated author, said, “For the year, Lululemon anticipates earnings rise to range from $11.74 to $11.94 per share compared to $10.07 last year. The company sees a 17% revenue increase to $9.44 billion to $9.15 billion. The guidance surpasses FactSet earnings forecasts of $11.60 per share on $9.37 billion in sales.”
Bearish Take Phil Wahba, a Nobias 4-star rated author, stated, “Since the acquisition, Lululemon has taken write-downs almost equal to Mirror’s price tag, meaning Mirror is now nearly worthless in accounting terms.”
LULU Jun 2023
Last week, Lululemon (LULU) reported its first quarter earnings, beating Wall Street’s estimates on both the top and bottom lines. These positive surprises helped to turn the tide for LULU shares and buck the negative trend that has played out in the appeal space throughout 2023 thus far.
Other athletic apparel/footwear companies such as Nike (NKE) and Footlocker (FL) struggled during their Q1 reports due to operational struggles in the world’s largest markets, the U.S. and China, ongoing inventory issues, and concerns about margin compression associated with promotions to offload product backlogs, there was major concern for LULU coming into its first quarter results.
Bullish Nobias Credible Opinions:
But, as Harrison Miller, a Nobias 4-star rated author, pointed out in the report that he published at Investors.com last week, Lululemon’s growth is here to stay. Miller wrote, “Athleisure apparel giant Lululemon Athletica (LULU) reported strong first-quarter results and full-year guidance late Thursday in what's been a mixed bag for retailers this earnings season.”
However, he noted, “Lululemon earnings didn't have to break a sweat to beat analyst forecasts. Earnings vaulted 54% to $2.28 per share while revenue leapt 24% to $2 billion.” Regarding the expectations that Wall Street had for LULU coming into the quarter, Miller wrote, “Analysts expected Lululemon adjusted earnings to bolt 32.4% to $1.96 per share while sales sprinted 19.3% to $1.924 billion.”
Looking at operating data, Miller said, “Comparable sales rose 13%, slowing from the 28% growth last year and 27% growth in the fourth quarter, respectively. FactSet guided same-store sales to rise 15.4%.” “Direct-to-consumer net revenue represented 42% of total sales, slightly lower than 45% from Q1 2022,” he continued.
Miller noted that for the upcoming quarter, LULU management guided towards 15% revenue growth and EPS to arrive in a range of $2.47 to $2.52 (in-line with consensus estimates of $2.49/share). “For the year,” he added, “Lululemon anticipates earnings rise to range from $11.74 to $11.94 per share compared to $10.07 last year. The company sees a 17% revenue increase to $9.44 billion to $9.15 billion. The guidance surpasses FactSet earnings forecasts of $11.60 per share on $9.37 billion in sales.”
Shoshy Ciment, a Nobias 4-star rated author, also reported on LULU’s results in an article that she published at Yahoo Finance titled, “What Lululemon’s Strong Results Say About Its Growing Standing in Retail”. Ciment said, “The athleisure brand, which typically caters to higher income consumers, has consistently managed to weather macro-economic headwinds plaguing the retail industry at large.”
Regarding the company’s ability to navigate ongoing supply chain issues, uncertain markets, and inventory build ups in the environment where other retailers struggled, she said, “Lululemon managed to maintain a full-price selling model as other retailers implement large-scale promotions.” “According to Morgan Stanley analysts led by Alex Straton,” she wrote, “Lululemon’s “unique pricing power” is a result of its strong core assortment, price integrity and premium margins.”
Ciment ended her piece stating, “Given the positive results this quarter, analysts have largely remained bullish on Lululemon’ growth trajectory through the remainder of the year, as it introduces new products and expands to new markets.”
Bearish Nobias Credible Opinions:
Phil Wahba, a Nobias 4-star rated author, published an article this week at Yahoo Finance that highlighted the plan that Lululemon CEO, Calvin McDonald, put into place to generate such strong results.
Wahba began his piece by highlighting LULU’s $500 million acquisition of Mirror in 2020 - the company’s first attempt to diversify away from clothing and into the exercise space to compete with companies like Peloton (PTON).
However, he notes, “Since the acquisition, Lululemon has taken write-downs almost equal to Mirror’s price tag, meaning Mirror is now nearly worthless in accounting terms.” In response to that saga, Wahba says that McDonald has pivoted to growth ideas within the apparel space. “He [McDonald] told investors in 2022 that he plans to hit $12.5 billion in revenue by 2026 as Lululemon becomes an ever more formidable rival to Nike and leaves competitors like Under Armour in its dust,” Wahba wrote.
“Lululemon’s branding as a hip retailer targeting a wealthy clientele has been vital to its growth, hence why the company is credited with the invention of “athleisure,” at the intersection of good fit and high-quality fabrics,” he said.
However, Wahba added, McDonald wanted to diversify the company’s product lines. “It’s slowly expanded into menswear and, more recently, golfing and hiking clothes,” he wrote. “After all,” he continued, “one cannot reach $12.5 billion in annual sales on women’s yoga pants alone.” McDonald’s plan is obviously working; Wahba points out that LULU is clearly outperforming its peers.
“Lululemon’s performance contrasts with the sharp decline in sales in the past year at rival brands like Gap Inc.’s Athleta and despite the arrival of up-and-comers in the higher-end activewear space like Vuori, Rhone, and Alo Yoga,” he said.
“Another big prong in McDonald’s plan is making Lululemon a global player,” Wahba added. “Canada, its home market, and the U.S. together generate 86% of its revenue,” he wrote. “But Lululemon sees tremendous opportunities abroad, notably in the U.K. and China.” “Last quarter, international sales rose 60%,” Wahba said.
He states that Nike is expected to generate roughly $50 billion in revenue this year. So, Lululemon still has a long way to go to become the top brand in the athletic apparel space. But, he said that analysts believe that LULU has what it takes to continue to take market share over the long term.
Sell-side Analysts Opinions
Regarding Wall Street’s opinion of Lululemon, two 4-star Nobias ratings have updated their outlooks on LULU shares since the company’s recent Q1 report.
Paul Lejuez, a Nobias 4-star rated analyst from Citi, recently raised his price target on LULU shares. According to The Fly on the Wall, “Citi raised the firm's price target on Lululemon to $450 from $440 and keeps a Buy rating on the shares. The company's Q1 sales and earnings were better than expected on every line item and much better than investors feared, the analyst tells investors in a research note. In a "choppy macro environment" in the U.S., Lululemon grew sales 17% in the region, underscoring the strength of the brand in its most well-developed market, says the firm. Citi believes Lululemon is one of the most compelling growth stories in retail.”
John Kernan, a Nobias 4-star rated analyst from SG Cowen, also recently raised his LULU price target. According to The Fly on the Wall, “TD Cowen raised the firm's price target on Lululemon to $531 from $525 and keeps an Outperform rating on the shares.
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.
The firm said stores continue to be a key catalyst in customer retention and acquisition, and they also serve as "focal points for community gatherings, product launches and connectivity/loyalty that are key to the retailer's community-based customer engagement model".”
Overall bias of Nobias analysts and Bloggers:
Overall, 4 out of the 5 credible analysts who cover LULU believe that shares are likely to increase in value. The average price target being applied to Lululemon shares by these analysts is $430.00.
Currently, LULU trades for $360.40. Therefore, that average credible analyst price target implies upside potential of approximately 19.3%.
The credible authors that the Nobias algorithm tracks share this positive sentiment. 85% of recent articles focused on LULU shares have expressed a “bullish” bias.
Disclosure: Nicholas Ward has no LULU position. Nicholas Ward wrote this article for Nobias at their request with the intention 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.