The Canadian-American apparel manufacturer Lululemon Athletica looked to be a model success story for the fast-growing clothing sector at the end of 2021. The company saw its share price hit an all-time high of $485 in November, having already risen 390% since 2017.
As its store footprint grew to 552 outlets, the business also thrived, clocking-in profit increases of 175% over the last half-decade, growing on the back of excellent sales figures and improved margins. The firm’s reach also expanded, as the brand evolved from simply selling women’s yoga pants to breaking into the lucrative men’s market too. Indeed, the men’s segment represented a revenue boost for the company of 44% in the last quarter, outpacing its female equivalent, which also grew at a very healthy 25%.
But the fairytale did not last. Since December last year, the firm witnessed its market value tumble by more than 25%, as inflated interest rates and the spread of the COVID-19 Omicron variant took its toll. If that wasn’t enough, updated guidance for the fourth quarter of 2021 also depressed expectations, with revenue and earnings predicted to be at the low-end of its stated range.
However, with the stock rallying nearly 15% in the early stages of last month, could there be a reversal in fortunes for this once mighty brand?
Why Did LULU’s Share Price Fall?
While Lululemon’s business wasn’t centered entirely around its brick-and-mortar outlets, a good portion of its sales was still generated from in-store purchases, which, naturally — took a hit over the course of the coronavirus pandemic last year. However, in a recent press release, LULU warned investors that the worsening retail environment brought about by the emergence of the new COVID-19 variants could potentially close “some or all of its stores,” further affecting the company’s revenue-generating ability.
In addition to this, supply chain and inventory issues also scuppered the brand’s new clothing range launch, and the temporary closure of its Vietnam factories over the summer didn’t help matters either.
With obstacles building up for the business, the firm’s management was forced to admit that, despite having had a strong holiday season, the company was expecting its net revenue to fall short of the consensus estimate of $2.17 billion, as was its EPS, which was anticipated to miss the $3.35 mark and come in somewhere around the low-end of $3.25 to $3.32.
Not surprisingly, all this negative sentiment had a deleterious impact on LULU’s stock price, resulting in the firm hitting lows not seen since the early half of 2021.
Lululemon Is Still Growing Strong
In its third-quarter earnings results, LULU reported a 30% growth in its total revenue figure of $1.5 billion, with its men’s and accessories segments also both performing well. The firm’s comparable store sales increased 32%, as did its direct-to-customer revenue of $587 million, growing 23%. Gross profits of $830 million rose 32%, and diluted earnings per share of $1.44 were up year-on-year from 2019’s comparable quarter at $0.96.
Lululemon’s geographical breakdown showed that revenues from the North American market were up by 28%, while international sales grew 40%. However, China was the real winner here, with an astonishing 70% 2-year CAGR improvement. The company added another 37 net new stores to its portfolio, and despite rising air freight costs, the business still managed to raise gross margins by 210 basis points.
Will LULU Rebound?
For a company operating in the consumer discretionary sector, LULU’s trailing-twelve-month revenue growth of 44% is extraordinary, especially considering that the industry average is just 21%. That said, on a forward-looking basis, that growth is expected to slow to 22% over the coming year — which, when judged against the wider market’s 9%, is still pretty good.
However, Lululemon’s revenue metrics are just one part of the picture. The company made a bad call 18 months ago when it bought the in-home fitness brand MIRROR. At the time, the acquisition looked solid: the business was sold at just 2-times its forward sales number for $500 million, with LULU expecting at worst a yearly revenue from the operation of $250 million.
But, fast-forward to today, and the company slashed that figure to $125-$130 million, and the deal doesn’t look anywhere near as attractive. And even though the revenue from MIRROR is only around 5% of LULU’s entire top-line, the magnitude of this scale-down doesn’t engender confidence going forward.
With the recent pull-back in LULU’s share price, you would be forgiven for thinking that the company should be cheaper on a strictly valuation-based consideration. But… it’s not. The business has historically traded in the region of 36-times earnings — and yet, right now, it’s trading substantially higher, at around 47-times.
This doesn’t necessarily mean that LULU still has further to fall, but it does mean that, at the present moment, anyone buying Lululemon stock has to be willing to pay a handsome premium for the opportunity. But, with strong revenue growth and proven profitability, it might just be the right thing to do.