The market struggled for gains on Monday, Jan. 14, but one stock that strongly bucked the broader market trend was Lululemon (NASDAQ:LULU). The athletic apparel company provided a positive update on fourth-quarter numbers following a strong holiday season. Management lifted their fourth-quarter comparable sales growth, revenue and profit guides. Lululemon stock jumped nearly 10% in response.
In the big picture, the holiday sales update confirms that the Lululemon brand isn’t losing any momentum, and that the company does have a medium to long-term opportunity to continue to grow sales at a rapid rate and transform into a mini Nike (NYSE:NKE) or mini Adidas (OTCMKTS:ADDY) for a higher price point audience.
That outlook is favorable for Lululemon stock. Even after this 10% pop, the market cap on Lululemon stock is still under $20 billion. Adidas has a $40 billion-plus market. Nike’s market cap is up over $120 billion. Thus, if Lululemon can sustain its present operational momentum, Lululemon stock will continue on an upward path.
Having said that, the stock now seems fairly valued. Upside in the near term may be capped by valuation. But, longer term, this will be a $200-plus stock, meaning there’s no reason to sell for long-term investors.
High Quality Holiday Update
From head to toe, Lululemon’s fourth-quarter guidance update was a healthy one with no glaring negatives.
Based on strong holiday sales, Lululemon upped its comparable sales, revenue and earnings guides for the fourth quarter. Comparable sales were supposed to be up ~10%. Now, they are supposed to rise in mid- to high-teens range. Revenues were supposed to grow just over 20%. Now, the company is guiding for 23% revenue growth. Earnings were supposed to come in at $1.66. Now, they are expected at $1.73.
From all those updates, there are two big takeaways.
One, the outstanding momentum that the Lululemon brand generated in early 2018, didn’t lose any steam by the end of the year. Through the first three quarters of the year, comparable sales were growing in the mid- to high-teens range. Management shocked the world in early December by saying that fourth-quarter comparable sales growth would slow dramatically to ~10%. Lululemon stock dropped.
As it turns out, management just sandbagged that guide. Comparable sales growth isn’t going to slow all that much in the fourth quarter. Instead, it will be almost exactly what it has been all year (15%-plus), and that’s proof that this brand’s operational momentum is more than just a flash in the pan.
Two, Lululemon is generating high quality, high margin sales growth acceleration. Lululemon management hiked the revenue guide by 2%. The company hiked the earnings-per-share guide by 4%, and they also kept the expected tax rate and share count constant. The implication is that margins progressed much better than expected during the quarter. That means this sales momentum is not promotion driven. Instead, it’s demand driven, and that bodes well for continued success in 2019.
A $200 Stock In the Long Term
In the big picture, Lululemon’s holiday sales update confirms that this company remains a big revenue growth, big margin expansion company with big long-term potential.
Putting numbers to those words, this is most likely a 10-15% revenue growth company over the next several years as growth slows from tougher laps and with bigger scale. During that stretch, gross margins should continue to expand due to pricing power from huge demand, and opex rates should fall thanks to steady double-digit revenue growth. All together, this is a 10-15% revenue growth company with healthy long-term margin drivers.
Modeling that out, I believe Lululemon has the opportunity to grow EPS to $8.50 by fiscal 2023, on a sales base of nearly $6 billion by then and operating margins north of 25%. At that point in time, Lululemon stock should trade at a Nike-type multiple. Nike normally trades around 25 forward earnings. A 25 forward multiple on $8.50 implies a fiscal 2022 price target of over $210. Discounted back by 10% per year, that equates to fiscal 2018 price target of $145.
Thus, in the near term, Lululemon stock seems fairly valued. But, in the long run, this stock will march above $200 within the next four to five years.
Bottom Line on LULU Stock
Lululemon continues to execute flawlessly on its opportunity to go from niche, yoga-focused retailer, to broad, athletic apparel retailer. That opportunity is huge, and paves the path for Lululemon stock to march above $200 in the long run.
In the near term, valuation friction may create some turbulence. That turbulence is just noise, and should be largely ignored by long-term investors.
As of this writing, Luke Lango was long LULU and NKE.
