The Lululemon Saga: Unraveling the Mysteries Beyond Q4 Results

[Note: Lululemon’s fiscal year 2023 concluded in January 2024]

Lululemon (NASDAQ: LULU), the renowned purveyor of athletic and casual apparel, is set to unveil its fiscal fourth-quarter performance on March 21. Analysts predict that LULU stock may experience stagnation as revenue and earnings meet market anticipations. The company’s revenue for the first three quarters of fiscal 2023 (ending October 29) elevated by 20.1% year-over-year (y-o-y) to $6.4 billion. Simultaneously, operating income leapt by 20% y-o-y to reach $1.2 billion, with net income also surging by 20% to $881 million. Furthermore, it achieved a noteworthy milestone with free cash flow ballooning to $467 million, a significant turnaround from the preceding year’s outflow. Despite these stellar figures, concerns loom over LULU stock’s bloated valuation. Lululemon’s price-to-earnings (P/E) ratio escalated from approximately 42x in FY 2021 to 47x by the close of FY 2022. The P/E multiple remains perched at 59x presently, signaling an overvaluation compared to historical norms and industry peers such as Nike boasting a P/E ratio of 30x.

LULU stock encountered a rollercoaster ride, ascending by 35% from $350 in early January 2021 to approximately $465 at present. Yet, this ascent was marred by undulating performances – 12% returns in 2021, a setback of 18% in 2022, followed by a remarkable resurgence of 60% in 2023. Contrasted with the S&P 500’s trajectory, which witnessed a rise of 27% in 2021, a slump of 19% in 2022, and a 24% hike in 2023, it’s evident that LULU faltered behind in 2021. Bearing in mind the arduous task of consistently outperforming the S&P 500 amidst market tumult, heavyweight contenders like Amazon, Tesla, Toyota Motor, Google, Microsoft, and Apple all faced challenges. However, the Trefis High-Quality (HQ) Portfolio, comprising 30 select stocks, outshone the S&P 500 annually, underscoring superior performance amidst market volatility. The enigma remains – Why? The HQ Portfolio commanded steadier returns with lesser risk exposure vis-a-vis the benchmark index, a testament to its stability in contrast to the market’s vicissitudes. Against the backdrop of a volatile macroeconomic landscape characterized by soaring oil prices and escalating interest rates, could LULU replicate its 2021 underperformance against the S&P 500 over the ensuing year, or are spectacular gains on the horizon?

Our prognosis forecasts a valuation of $446 per share for Lululemon, closely aligning with the prevailing market price. Dive deeper into our immersive analysis with Lululemon’s Earnings Preview: What To Expect in Fiscal Q4?.

Anticipated Revenues and Earnings Performance

(1) Revenue Projections in Tune with Estimates

Per Trefis projections, Lululemon’s Q4 2023 revenues are poised to hover around $3.2 billion, a figure in consonance with consensus estimates. In the third fiscal quarter, the company witnessed a stellar 19% y-o-y upswing in revenue, towering at $2.2 billion, a feat unmatched by counterparts like Adidas and Puma who grappled with declining figures. Moreover, Lululemon inaugurated 14 net new stores while registering a notable 13% hike in total comparable-store sales, with retail store comps escalating by 9% and direct-to-consumer revenue soaring by 18% vis-a-vis the previous year. For the fiscal year 2023, revenue forecasts predict a robust 18% y-o-y surge, reaching $9.6 billion. In an exemplary move towards expansion, Lululemon sealed a five-year alliance with fitness content and equipment provider Peloton in September 2023, envisaging the promotion of Lululemon’s athletic attire at Peloton outlets. Additionally, the management unveiled a strategic blueprint dubbed “Power of Three x2,” designed to double the FY 2021 revenue to $12.5 billion by 2026, building on the foundation laid by the initial “Power of Three” strategy announced in April 2019, focused on amplifying digital revenue streams and accelerating growth. LULU’s growth horizons are anchored in international outreach, primarily as its International segment currently contributes a mere 16% to the total revenue figures, alongside leveraging the burgeoning men’s apparel sector.

(2) Consensus on Earnings per Share (EPS)

Forecasts indicate that Lululemon’s Q4 2023 EPS is slated to hit $5.00 as per Trefis evaluations, aligning harmoniously with consensus figures. In Q3 2023, the retailer witnessed a remarkable 27% y-o-y escalation in adjusted earnings, culminating in $2.53 per share.

(3) Valuation Parallels the Current Market Price

Based on Lululemon’s valuation metrics, envisaging an EPS estimate hovering around 10.96 and a P/E multiple of 40.7x in fiscal 2023, the valuation correlates to $446, a mere 4% decline from the existing market valuation.

Envisage comparative insights with its peers. Delve into how Lululemon’s Peers fare concerning salient metrics for a comprehensive analysis. Explore additional comparative benchmarks for companies spanning diverse sectors in Peer Comparisons.