Lululemon (LULU) is set to report fourth quarter fiscal 2021 earnings results after the closing bell Tuesday. While the yoga sports apparel specialist continues to dominate retail, employing a winning strategy to lead the secular health and wellness trend, valuation fears have emerged.
After a 56% rally over the past year, Lululemon’s stock has fallen 10% year to date, trailing the 6% rise in the S&P 500 index. Competition concerns from the likes of Nike (NKE) and Under Armour (UA), among others, have also pressured the stock. But these fears appear to be misplaced given the company’s strong Q3 results, putting LULU on track to surpass its growth plan despite the pandemic disruptions.
Trading at a forward P/E ratio of 69 times and a forward Price/Sales ratio of 9.5 time, well above the S&P 500 index, LULU stock price assumes not only another beat-and-raise quarter on Tuesday, but also flawless execution going forward. But that’s not the first time Lululemon, which is positioned to dominate a $3 trillion global wellness market, has heard the valuation argument. This seems like a good buying opportunity for investors who have a longer-term horizon.
Operating more than 500 athletic apparel stores around the world, the company continues to expand internationally while growing its online, direct-to-consumer business. Revenue growth outside of North America reached 45% in Q3, recovering well from the first two quarters. For the stock to revert back to its growth trajectory, the company on Tuesday will need to provide updates on its growth initiatives, including its Men's and digital revenue categories, while projecting profit margin expansion.
For the quarter that ended February, Wall Street expects the Vancouver-based apparel maker to earn $2.49 per share on revenue of $1.66 billion. This compares to the year-ago quarter when earnings came to $2.28 per share on revenue of $1.48 billion. For the full year, earnings are expected to be $4.58 per share, down from $4.93 a year ago, while full-year revenue of $4.33 billion would rise 8.9% year over year.
Despite lower physical stores' productivity, the company last quarter produced strong top-line growth, further demonstrating why it's the clear-cut leader in its category. Third quarter revenue grew 22% year over year to $1.12 billion, easily beating estimates of $1.05 billion. The beat was notable given the capacity constraints the company has endured in some markets due to the pandemic. LULU benefited from its direct-to-consumer channel which accounted for 43% of total revenue, while digital comps surged 93% year over year.
The bottom line was just as impressive, rising 21% year over year to $1.16, above consensus of $1.10. The company's Q3 results demonstrated the execution of the various key metrics management has targeted, including Men's revenue which grew 14% year over year. The company’s recent acquisition of MIRROR also boosted revenue during the quarter. The company noted that it now expects MIRROR revenue of over $150 million, up from previous estimates of $100 million.
When considering that LULU paid just $500 million in the deal for MIRROR, expecting over $150 million in revenue (and growing) suggests the deal will soon pay for itself. Investors are eager to see whether these growth trends in MIRROR, Men’s category, e-commerce, among others, can continue. And if so, LULU’s recent stock pullback might have stretched too far in the wrong direction.
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