During its most recent earnings announcement, Lululemon reported a revenue increase 28% year-over-year to $1.9 billion while net income rose by 36% to $255 million. Same-store sales also increased by 22%. For the current quarter, the company expects revenue to rise 25%.
While many other retailers are struggling due to the challenging macroeconomic conditions of high inflation and interest rates, Lululemon continues to gain market share. But it’s not all rosy for this popular apparel firm.
Lululemon’s Balance Sheet Isn’t All Peachy
Lululemon’s inventory balance soared by 85% from the same period the previous year. A high level of inventory can be a problem if a company needs to offer promotions and discounts to sell merchandise quickly before it becomes outdated or unpopular with shoppers. But Lululemon has not traditionally needed to cut prices.
A cult-like following from its customers has been effective in maintaining a high gross margin of over 53% on average over the past decade, demonstrating the strength of the brand and its pricing power – a key ruleset Buffett looks to in order to survive inflationary periods.
Executives have guided revenue of $7.97 billion for the full year, a 27.4% increase compared to 2021, and adjusted EPS of $9.92, up 27% year over year. In light of the economic backdrop, these figures are impressive.
Lululemon’s long-term outlook remains strong as well, with the company’s “Power of Three” financial plan predicting it will reach $12.4 billion in annual revenue in fiscal 2026.
The stock currently trades at a P/E ratio north of 35, significantly below its trailing five-year average above 50, but is it still too pricey to buy?
Squeezing Juice To Make (Lulu)Lemonade
Despite economic headwinds, Lululemon has the potential to expand into new markets and cater to a broader customer base.
While a recession could potentially impact this momentum, the business is likely to return to solid growth once the next economic expansion cycle begins.
And at current prices, valuation is starting to appear compelling.
Lululemon Fundamentals Are Compelling
Management has provided guidance for $2.63 billion in fourth-quarter sales at the midpoint, representing a 25% increase from the previous year, and EPS of $4.25 at the midpoint compared to $3.36 the previous year. Wall Street is expecting $2.7 billion in revenue and $4.29 in EPS.
Given Lululemon’s strong performance, growth strategy, and affordable price, it appears to be a compelling buying opportunity.
The average analysts consensus estimate for the stock now is $390 per share, and while that’s above our estimate we still see double-digit percentage increase potential.