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Lululemon Stock Is A Winner, But Don’t Expect Huge Gains Right Now

Lululemon stock could hit $200 in the long run, but current valuation limits near-term upside

By Luke Lango, InvestorPlace Contributor

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Lululemon stock probably tops out around $160

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The stock market has had its fair share of big winners so far in 2018, and one of them has without question been Lululemon (NASDAQ:LULU).

The yoga and athletic apparel retailer just reported second-quarter numbers that not just beat expectations, but smashed expectations across the board, giving the bull thesis a ton of firepower. In response to the strong numbers, LULU stock rose more than 15%, and is now up more than 100% year-to-date and 175% over the past 12 months.

Make no mistake about it. LULU stock has been a big winner, and that is because Lululemon is going from a niche yoga pant retailer to a legitimate force in the entire global athletic apparel scene. This trend isn’t showing any signs of slowing. If anything, it is only accelerating. As such, LULU stock should continue to be a winner because this growth narrative has a long runway.

But, a lot of that growth potential is already priced into shares. LULU stock is trading at 45x forward earnings, a multiple which seems to fully encompass this company’s long-term growth prospects. As such, while I don’t think LULU stock will collapse so long as it is supported by this phenomenal market expansion narrative, I do think that the era of big gains is over.

Investment implication? No need to buy here. This stock needs to pull back. And it will. Soon. Depending on the magnitude of that pullback, that could be an opportunity to the buy the dip.

Lululemon Is on Fire

When I first saw Lululemon’s headline numbers, my first thought was, “Wow.” As I combed through the press release and listened to the call, my second, third, fourth, and fifth thoughts were all, “Wow.”

In other words, Lululemon’s second quarter earnings report was simply a “wow” report.

Revenues rose a whopping 24% year-over-year. Total comparable sales rose 19%, driven by a 10% increase in store comps and a 65% increased in adjusted e-commerce comps. Gross margins rose 360 basis points. Operating margins rose 670 basis points. Earnings essentially doubled year-over-year. The guide called for low-teens comps and big profits in both Q3 and the full-year.

The drivers of these huge numbers seem to have longevity. Both the men’s and women’s business are killing it right now, with the pants category for each posting a 30% comp in the quarter. The e-commerce business is on fire and only growing, as the company’s email file expanded 80% in the quarter. Lululemon is also aggressively expanding in Asia, and that expansion is going really well. Combined comps in Asia rose 50% in the quarter, driven by a greater than 200% comp increase in China e-commerce sales.

Overall, the writing is on the wall for Lululemon. This company used to be a niche, U.S.-focused women’s yoga pant retailer that had a devout core demographic, but not much awareness outside of that niche. Today, Lululemon is turning into a global athletic apparel retailer with wide reach that extends far beyond the women’s yoga market. Tomorrow, Lululemon has opportunity to scale into an athletic apparel brand on par with Under Armour (NYSE:UAA), Nike (NYSE:NKE), Adidas (OTCMKTS:ADDYY) and Skechers (NYSE:SKX).

Lululemon Stock Needs To Cool Off

The growth runway for Lululmeon is huge. This is a company that is expected to do just over $3 billion in sales this year. Between Under Armour, Nike, Adidas, and Skechers, revenues run from ~$5 billion to ~$36 billion.

Thus, Lululemon has a long ways to go before this growth narrative starts to slow.

But, at current prices, LULU stock is priced for that big growth. This company will never get to Nike or Adidas size. Those companies have a global presence across the whole athletic apparel scene, including the highly lucrative basketball and soccer markets. Lululemon doesn’t have that, but it doesn’t aspire to either. As such, dreams of $20 billion-plus in revenues are silly.

Having said that, Lululemon could easily grow revenues to $5 billion or more over the next five years, making it as big as Under Armour and Skechers. Meanwhile, gross margins will continue to trend up because the company’s exclusive direct selling model preserves high-quality brand image and pricing power. The SG&A rates should fall as big revenue growth continues to drive leverage. Overall, I think this is a company which can get to $5 billion in revenues and net 25-30% operating margins in five years.

Under those assumptions, I aggressively think Lululemon can net earnings per share of roughly $8.50 in five years. At that point in time, LULU stock should trade at a Nike-type multiple. Nike’s five-year average forward earnings multiple is 25x. A 25x forward multiple on $8.50 implies a four-year forward price target of ~$213. Discounted back by 10% per year, that equates to a year-end price target of $160.

LULU stock trades just below $160 today.

As such, I think investor euphoria has pushed LULU stock to its year-end price target today, and we are only halfway through the fiscal year. I interpret that as meaning that gains over the next several months and quarters will be tough to come by.

Bottom Line on LULU Stock

Long-term, LULU sock can push above $200 as the company turns into a global athletic apparel retailer with wide reach. Near-term, however, LULU stock price has sprinted ahead of fundamentals, and needs to cool off before taking its next leg higher.

As of this writing, Luke Lango was long SKX. 


Article printed from InvestorPlace Media, https://investorplace.com/2018/08/lululemon-stock-is-a-winner-but-dont-expect-huge-gains-right-now/.

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