Lululemon LULU is up 16% in morning trading, hitting an all-time high of $171.45 after a strong earnings release. LULU announced an EPS of 1.85, beating expectations by 6.3%. Posting 26% year-over-year growth in quarterly revenue and profits up 84% for Q4. The operational margins are up to 21.5% for the fiscal year up from 17.2% in 2017 illustrating leaner operational performance. Below you can see that 10-year revenue growth has been very consistent averaging 22% year-over-year and LULU stock price has increased over 3000% in the same time frame.
Lululemon has ingrained its name in yoga/gym culture, being the preeminent apparel provider for this category. From its inception in 1998 out of Vancouver, British Colombia, Canada, this firm has evolved into the “athleisure” cultural driver we know today. I first recognized Lulu as a women’s brand for yoga pants around 2010 and would never have thought I would ever own, let alone wear, anything from this brand. Two years later I went into one of their stores, being pressured by my girlfriend, and discovered how aesthetically pleasing and comfortable their men’s athletic wear was. Ever since I have been an avid enthusiast of Lulu as I know many other men have also become. Whenever I go to the gym today, it seems like 75% of the apparel I see is Lululemon branded.
Like every apparel retailer still in business, Lululemon has put a lot of focus on its e-commerce segment. They had a 39% increase in direct-to-consumer sales, representing 26% of total revenue. The real Cinderella story comes from their in-store sales growth. As brick-and-mortar retailers take a perceptive nosedive with numerous store closures and bankruptcies, Lululemon has found a way to not just keep its head above water but walk on it. Lulu had a 7% increase in sales on a constant dollar basis for fiscal 2018 having opened 36 new stores in 2018, including 21 stores outside the United States and is now operating in 14 different nations.
The earnings story for Lululemon is a very positive one. Earnings were previously expected to grow 14.58% in fiscal 2019 and 19.24% in 2020, but the EPS estimates are subject to change as a result of the significant Q4 beat announced yesterday afternoon. Currently, LULU is a Zacks Rank #3 (Hold), but I am confident that once these EPS numbers and further adjustments are priced into the model, it will rank up to a Zacks Rank #1-2 (Buy).
Lululemon has been a steady growth story since its IPO. I don’t see a reason that this expansion wouldn’t continue as they penetrate foreign markets and further captures market share from its top competitors like Nike NKE, Under Armor UAA, and Columbia Sportswear COLM. LULU is a sensible buy with a reasonable price/earning-to-growth (PEG) valuation of 1.68, considering increasing growth expectations. This valuation is most useful for fast growing companies because it accounts for the expected EPS growth rate. As you can see in the chart below LULU’s PEG is close to converging with the apparel industry average. Be careful not to buy the peak though, considering its at an all-time high today. I would wait for the earnings hype to settle before putting a position on.
Columbia Sportswear is another apparel retailer who has been able to win the fight against the category decline. This business has been able to post consistently strong growth on both top and bottom lines. A forward PE of 23x makes a fast growing retailer like Columbia an equitable buy. COLM just posted robust earnings back in February beating the consensus by almost 33% pushing them into a Zacks Rank #1 (Buy).
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lululemon athletica inc. (LULU) : Free Stock Analysis Report
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