Lululemon Athletica Stock: Getting in Shape (NASDAQ: LULU)


In July 2020, I concluded that quality prevails in the case of Lululemon Athletica (NASDAQ: LULU) because the company has done a lot of things well in recent years, while also making an interesting and good acquisition at the time also. That all sounds great, but the excellent operating performance translated into better share price performance, with the shares trading at 50-60 times normalized earnings at the time, a risky valuation either so long as strong operational performance kept me from going bearish as well.

Back to 2019

When I looked at Lululemon in the summer of 2020, which was a very strange summer, of course, the basis of the thesis was the results of 2019, a year in which revenue increased by 21% to 4, $0 billion, all driven by comparable sales growth as operating margins were 22% of sales. These results caused sales to essentially double from the 2014/2015 period as margins increased, while the company also reduced the number of shares.

Lululemon shares were trading at $312 at the time, as a net cash balance of more than $1 billion was reduced to an operating asset valuation of $300 per share. This must be seen in light of a stock count of 130 million shares, revealing that Lululemon was valued at $39 billion, a huge valuation at around 10 times sales and around 60 times earnings.

The stock price in the low $300s marked all-time highs at the time as the company’s shares traded around $250 pre-pandemic as investors were genuinely bullish with Lululemon being a great direct-to-consumer play, certainly as consumers. could opt for more sport and certainly at home during the pandemic.

This was already seen in the results of the first quarter of that year (a quarter that ended at the beginning of May). Even though sales fell 17% to $652 million, the direct-to-consumer segment was responsible for the majority of sales, as there was a 68% increase in sales in this segment, although the shift in intercompany sales has significantly hurt margins with retail operations. get decimated.

In the meantime, the company has acquired home fitness innovator MIRROR in a $500 million deal, with live classes and on-demand workouts perfect for Lululemon’s ecosystem. The deal was really just a rounding error at the time, although it would deplete most net cash balances, as the overall valuation was still too demanding for me to get involved, despite absolute world class operations.

Two years of preparation

Since I last looked at Lululemon in the summer of 2020, stocks have seen some pretty volatile moves. Shares continued to rally, albeit with some volatility, and hit a high of $485 per share in the fall of 2021. Lululemon falling victim to a reversal in tech and other highly regarded names, shares are now down to $285 per share. This marks a roughly 10% drop in sales over a two-year time window, marking a dramatic underperformance relative to the market as the company failed to meet exorbitant expectations and its valuation, of course.

In March this year, Lululemon released its results for fiscal year 2021. The company saw continued strong demand, with revenue growing 42% to $6.3 billion. These are very strong results as stores have been on fire, with the revenue share of the direct-to-consumer segment falling to 44% of sales as stores reopen across the world. The company delivered a strong margin performance, with adjusted operating margins up 270 basis points to 22.0% of sales. These adjusted figures approximate GAAP figures.

The company posted GAAP earnings of $7.49 per share, but business traction was evident as second-half results were significantly stronger than first-half results, with adjusted earnings per share up thirty cents. Additionally, net cash of $1.3 billion was equivalent to about $10 per share.

More good news has been announced for 2022, a year in which revenues are expected to reach a range of around $7.5-7.6 billion, which represents annual growth of 20-22%. Earnings are expected to rise at a similar pace, with earnings estimated at $9.25 per share, plus or minus ten cents.

In April, the company laid out big ambitions for the coming years as it set a goal to double its revenue again to $12.5 billion by 2026, a huge goal that could be achieved by targeting men and women. by developing international operations. While these goals are generally attractive, there is little evidence to back up these ambitions, as we’ve seen other retailers also make aggressive plans, only to then miss them. But again, I think Lululemon is a different animal here.

In early June, the company reported strong first-quarter results, with first-quarter sales rising 32% to $1.6 billion, with growth split between US and international operations. The growth was roughly evenly split between stores and online operations. Earnings came in at $1.48 per share in a milder seasonal quarter as the company raised its sales guidance to $7.6-$7.7 billion, with adjusted earnings now in the range of $9.35 and $9.50 per share. The company repurchased a few more shares, but a net cash position of nearly $700 million is still substantial.

Final Thoughts

The fear in the market is simply a reduction in the forecast, even as the company raised the same forecast just a few weeks ago as the macro picture deteriorates a bit and as inflation and supply chain issues always make the headlines. Trading at $286, unleveraged assets are trading at $280 as earnings power around $9.50 per share shrinks to a multiple of 30 times earnings.

Comparing this to the summer of 2020, we saw the share price largely flat, but a 50-60x premium valuation fell to 30x on the back of strong operating earnings performance , creating a multiple contraction in valuation on both sides.

Right now we have to perform a balance exercise. The earnings multiple has contracted to 30x, still a huge multiple because the earnings yield of 3.3% has to compete with the interest rate investments there, but they don’t offer the same kind of growth than Lululemon, of course. The fear is a slowdown in spending and competitive pressures from Nike, adidas and Under Armour. Yet the strong performance of the companies is unprecedented, as the 2026 ambitions are quite ambitious by any measure.

Amid all of this, I’m warming up a bit to Lululemon, acknowledging that quality is never cheap but prevails over the long term, as further dips to the $250 mark or stagnation around that level in the months to come could be used as an entry point here.

James T. Quintero