Lululemon Athletica (NASDAQ: LULU) is a sports apparel company focusing on clothing developed for a healthy lifestyle and athletic activities, including yoga, running, training, and various sweaty recreations.
While Lululemon has built its brand around such niche activities, the company has amassed international appeal. Lululemon's top and bottom lines have been snowballing, while its margins remain very rich.
While gyms remain impacted by the ongoing pandemic, consumers have continued to show increased interest in outdoor sports and activities, which in turn has sustained heightened demand for Lululemon’s products. I remain bullish on the stock.
Brand Value Sustains Sky-High Margins
Lululemon’s revenue growth pace following the pandemic’s tailwinds has hardly faded out. In its Q3 2021 results, the company reported net revenue growth of 30% to $1.5 billion.
International sales, in fact, grew by 40%, which likely suggests that the company should gradually be becoming less reliant on U.S.-sourced revenues in the medium term as its sales mix broadens.
What differentiates Lululemon and makes the company quite investor-friendly compared to its larger peers is not only its more elevated growth pace but also its sky-high margins.
Lululemon has achieved exceptional profitability levels in the sports apparel industry due to reputing itself as a luxury brand. Hence, the company has been targeting higher-end consumers who are happy to pay a premium price for Lululemon's quality and brand.
To put things into perspective, Lululemon’s women’s leggings, the company's flagship product, average north of $100. Consequently, Lululemon’s gross margins are notably higher compared to the company’s competitors.
For instance, Nike (NKE) and Adidas (ADDYY) feature gross margins of around 46% and 50%, respectively. This compares to gross margins of ~58% (Last-Twelve-Months) for Lululemon.
This is quite impressive, considering Lululemon has inferior scale and production capabilities compared to such industry giants. Specifically, in its Q3 results, Lululemon reported a gross profit increase of 32% to $829.4 million, while gross margin expanded by 110 basis points to 57.2%.
For Q4 2021, Lululemon forecasts net revenues to land between $2.125 billion and $2.165 billion, suggesting a 24.2% year-over-year growth at the midpoint. Since Lululemon tends to beat its own estimates, I would expect stronger growth in its upcoming earnings report.
The Valuation
Lululemon combines a number of attractive characteristics, including rapid growth, rich margins, and strong brand power. For this reason, it's unlikely that investors find many chances to get their hands on the stock without paying a premium.
While Lululemon has constantly been growing into its valuation due to its strong growth, the stock still trades at a forward P/E of around 47.2.
Arguably, this is quite a rich multiple for the industry. However, with analysts expecting an EPS CAGR north of 20% over the next few years, I would expect investors to continue paying a premium for the stock.
Wall Street’s Take
Turning to Wall Street, Lululemon Athletica has a Moderate Buy consensus rating, based on 11 Buys and five Holds assigned in the past three months. At $470.31, Lululemon stock projections indicate 17.5% upside potential.
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Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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