Can Lululemon (LULU) sustain its market share and growth prospects? While the yoga apparel giant has shown it has no plans to relinquish its lead in athleisure market, the company’s operating momentum has begun to decelerate. But is all of the panic priced into the stock?
The company is set to report fourth quarter fiscal 2021 earnings results after the closing bell Tuesday. After a 26% decline over the past six months, Lululemon’s stock has fallen 20% year to date, trailing the 5% decline in the S&P 500 index. In January the stock fell 7% after the company guided for EPS and revenue at low end of its range. This raised concerns that Lululemon shares had stretched too far. The market also questioned whether Lululemon’s impressive revenue growth and strong customer acquisition had reached an inflection point.
What’s more, driven by intense competition from Nike (NKE) and Under Armour (UA), the company’s direct-to-consumer (DTC) business had begun to decelerate as DTC revenue regressed back towards pre-pandemic levels. The company is still well-positioned to dominate a $3 trillion global wellness market. Meanwhile, the company is expanding internationally while growing its online, DTC business. LULU management has done an amazing job delivering shareholder value. It is hard to bet against them over the long-term. The company on Tuesday must revive investor confidence by demonstrating the value in LULU stock.
For the quarter that ended January, Wall Street expects the Vancouver-based apparel maker to earn $3.27 per share on revenue of $2.13 billion. This compares to the year-ago quarter when earnings came to $2.58 per share on revenue of $1.73 billion. For the full year, ending January, earnings are expected to be $7.69 per share, up from $4.70 a year ago, while full-year revenue of $6.3 billion would rise 43.2% year over year.
The projected full-year revenue growth of more than 43% underscores the strength in LULU’s business and its loyal customer base, despite the increased competition. With its focus on health and wellness, the company has benefited immensely from the increased attention towards fitness driven by the pandemic. However, supply chain challenges have also impacted revenue. CEO Calvin McDonald noted in the Q3 conference call that the company's revenue would have been stronger if not for those challenges.
For the just-ended quarter which includes November, December, and January holiday-shopping season, investors are eager to learn how much (if any) impact supply chain headwinds might have had. Ahead of the quarter, the company had touted strong inventory within its core products. Analysts have forecasted a 20% to 25% rise in Q4 inventory. Combined with the fact that consumers were expected to commence starting their holiday shopping much sooner, this sets up for a favorable quarter, assuming LULU can execute has it has over the previous three quarters.
In the third quarter, the company beat on both the top and bottom lines with revenue rising 30% year over year, thanks to 28% surge in North America and a 40% increase internationally. Just as impressive, consolidated same-store sales rose 27%, well above the 22% analysts were looking for. Plus, when comparing to pre-pandemic levels, revenue rose 58%, with gross margin expanding 210 basis points.
While concerns about competition persists, it has not shown in LULU’s fundamentals, particularly in Q3 gross profit margins which expanded 110 basis points to 57.2%. Execution has never been the question. Nevertheless, on Tuesday LULU must issue the sort of guidance that suggests its premium position and margin expansion capabilities are sustainable amid rising inflation.
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