Lululemon Athletica (NASDAQ: LULU) stock appears to be holding up as upbeat Q2 earnings paint a brighter picture than expected. However, economic uncertainty makes investors nervous, is LULU stock an attractive long-term investment?
What Is Lululemon Athletica?
Athleisure chain Lululemon Athletica (NASDAQ: LULU) designs and retails athletic clothing products. The company began in Canada in 1998. It started as a yoga-inspired community hub and became famous for its high-quality yoga pants displaying unbeatable quality and comfort.
Today Lululemon designs and sells a range of fashionable sportswear for yoga, running, cycling, training, golf, and more. Its apparel includes fitness pants, shorts, tops, and jackets.
Lululemon Athletica serves customers worldwide.
How Does Lululemon Athletica Make Money?
Lululemon Athletica makes money selling its sports apparel to consumers from its physical stores and via e-commerce and digital sales. It also sells wholesale to locations such as yoga studios, fitness centers, gyms, and health clubs. Additionally, the company sometimes sells its product lines via pop-up locations, warehouse sales and showrooms.
LULU Q2 Financial Results
Lululemon Athletica reported its latest quarterly results on September 1, for the period ending July 2022.
Earnings per share (EPS) beat FactSet analyst consensus estimates by 18% coming in at $2.20 instead of the projected $1.86. Meanwhile, sales of $1.86bn beat consensus estimates of $1.77bn.
In light of Q2 results, Lululemon raised its full-year EPS guidance to a range between $9.75 and $9.90, up from $9.35 and $9.50 previously. LULU's Q3 outlook is for revenue to come between $1.78bn and $1.8bn. This represents a three-year CAGR of around 25%.
Net Revenue: $1.9bn (up 29% Y/Y)
Total Comparable Sales: increased 23%
Comparable Store Sales: increased 16%
Direct To Consumer Net Revenue: increased 30%
Gross Profit: increased 25% to $1.1bn
Gross Margin: decreased 160 basis points to 56.5%.
Income from Operations: increased 38% to $401.2m
Operating Margin: increased 140 basis points to 21.5%.
Income Tax Expense: increased 35% to $111.8m.
Diluted EPS: $2.26 compared to $1.59 (up 42% Y/Y)
Adjusted Diluted Earnings Per Share: $2.20 (up 33% Y/Y)
During Q2, Lululemon Athletica repurchased 0.4 million shares of its own common stock at an average price of $298.38 per share for a total cost of $125.3m. It ended the quarter with $498.8m in cash and equivalents. Plus it has access to $394.8m in a revolving credit facility.
The company opened 21 new company-operated stores, ending Q2 with 600 stores.
During the quarter, net revenue rose by 28% in North America and 35% internationally.
Direct-to-consumer net revenue represented 42% (up 1% Y/Y) of company sales.
Inventories at the end of Q2 rose 85% to $1.5bn, up from $0.8bn Y/Y. Lululemon believes its inventories are well positioned to support its projected revenue growth in Q3.
Meghan Frank, Lululemon Athletica CFO, stated:
Our teams continue to execute at a high level, which is driving our strong financial and business performance. Despite the challenges around us in the macro-environment, guest traffic in our stores and on our e-commerce sites remains robust, which speaks to the strength of our multi-dimensional operating model. I am pleased with our start to the third quarter and believe we are well positioned for the fall and holiday seasons.
LULU Stock Financials
Over the past year, LULU stock has traded between $251.51 and $485.83. Today it trades at around $314.37. Year-to-date, the Lululemon stock price is down by -18.94% while the S&P 500 is down by -18.19% over the same period.
For the full-year 2022, Lululemon expects net revenue to be in the range of $7.865bn to $7.940bn, representing a three-year CAGR of approximately 26%. Diluted EPS is expected to be in the range of $9.82 to $9.97.
The guidance does not reflect potential future repurchases of LULU shares.
FactSet analysts have an Overweight rating on LULU stock with a target share price of $378.56.
Lululemon Athletica Growth Potential
Last year, Lululemon was held back by a lack of inventory. This year it is in a better position and is looking at growth momentum with store openings and product line expansion.
The company recently launched SenseKnit, its proprietary fabric technology offering zoned compression for runners. This has proved successful in its core Scuba and Defined franchises for women and its ABC and Commission franchises for men.
The company has plans to launch a two-tier membership program shortly in North America.
Calvin McDonald, LULU CEO & Director, commented:
While the external environment around us has been challenging, we are seeing our guests respond strongly to our product innovations, our community activations, and our omni-operating model, which allows us to meet and exceed their expectations
Lululemon has been expanding into new categories, including footwear. It’s also looking at growth in some other sports categories, and most recently expanded into golf, tennis and hiking.
Lululemon's Power of Three x2 growth plan calls for a doubling of the business from 2021 net revenue of $6.25bn to $12.5bn by 2026. The key pillars of the company's plan are:
Meanwhile, its growth strategy includes a plan to double men's, double direct to consumer, and quadruple international net revenue relative to 2021.
Like most clothing retailers, Lululemon's business is affected by seasonality. Historically, the company has recognized a significant portion of its operating profit in Q4, as a result of increased net revenue during the Christmas holiday season. So, seasonal marketing tactics can prove lucrative.
LULU Stock Risks
The company has been dealing with supply chain challenges, particularly from China. With the COVID-19 lockdowns there, this may continue.
Ocean delivery times are improving, although they remain significantly elevated compared to the pre-COVID period.
LULU is using air freight to help ensure timely delivery of products in its distribution centers and is beginning to see these freight rates come down.
The company is involved in various lawsuits regarding patent infringement, both as the accuser and accused.
While most of Lululemon's retail locations are currently open, further resurgences in COVID-19, including from variants, could cause additional restrictions, including temporarily closing all or some of its retail locations again, resulting in lower consumer demand and causing further disruption in its supply chain.
If inflation and interest rate hikes push the country into a recession, consumers will have less disposable income for expensive leisurewear. As such, this could hit Lululemon's top and bottom lines.
Should You Invest in LULU?
Inflationary headwinds are a worry for all retailers, but Lulu's CEO does not yet appear concerned.
Calvin McDonald, LULU CEO & Director, commented:
Given the current macro backdrop, we have been looking closely at our guest data and metrics to identify any shifts in spending patterns, behaviors, or habits, and to-date, I am pleased to share that we are not seeing any meaningful variation in cohort behavior or the metrics we track in this area of the business
Retail makes for a volatile investment in the current macroeconomic conditions. Furthermore, LULU's financial metrics paint a potentially overvalued share price, which could have further to fall if headwinds prevail.
Whether you invest in LULU stock depends on your belief in the brand and if you're looking to make a quick trade or buy and hold LULU shares for the long haul.