Shares of Lululemon Athletica (NASDAQ:LULU) soared this week after the athletic apparel company reported fourth quarter 2018 numbers that beat consensus estimates across the board. LULU stock rose more than 15% to all-time highs.
Revenue topped expectations. So did profits and comparable sales growth. The guide was above consensus, too. Investors cheered the clean beat-and-raise.
Those who follow me know that I’ve been pounding on the table regarding the Lululemon stock bull thesis for most of 2019. That thesis is pretty straightforward: Thanks to a secular rise in consumer health and wellness trends, the athleisure category is only gaining ground in the global apparel market, and the top-quality, most desirable, and trendiest brand in that category is Lululemon. Thus, the fundamental backdrop sets LULU stock up for continued success in the foreseeable future.
At sub-$120 prices earlier in the year, LULU stock wasn’t priced for that continued success. But, the shares are now up 40% year-to-date, and trades at all-time highs. Is that continued success priced in now?
For the most part, yes. LULU stock looks fully valued here and now. To be sure, a full valuation may not keep the shares from heading higher in the foreseeable future, given that the numbers will likely remain strong in 2019. But, a full valuation does mean caution is warranted here. It won’t be clear sailing for the rest of 2019.
Lululemon Crushes The Numbers… Again
It’s hardly a surprise that Lululemon reported yet another clean beat-and-raise quarter. You’d have to go back more than two years to find the last time that the yoga pants maker didn’t beat both top- and bottom-line expectations in an earnings report.
Under the hood, the surge in Lululemon over the past several years isn’t hard to understand. Consumers globally are becoming more aware in areas like health, fitness, and wellness. This is due to a confluence of trends, including the rise of the internet, social media, photo-sharing apps, and mainstream coverage of health-related science research.
All in all, consumers are now borderline obsessed with eating right, going to the gym, and being natural. A big part of that obsession is looking the part. For both men and women, that includes wearing athletic clothing everywhere they can, both because it’s comfortable and because it has become the style which conforms with the aforementioned secular health and wellness trend.
Lululemon is a big part of this athleisure culture. Sure, Nike (NYSE:NKE) is the king of athleisure, and Adidas (OTCMKTS:ADDYY) is the mainstream runner-up. But, Lululemon is the cool brand. They are the high-quality player in the pack — the trendiest and expensive option that’s more lifestyle than performance, and acts somewhat as a status symbol.
Consequently, as the athleisure category has gained share, thanks to the secular health and wellness trend, Lululemon’s growth trajectory has substantially improved, and the numbers confirm this. Revenue is consistently growing at a 20%-plus pace. Comps are running in the high-teens range. Gross margins are powering higher. Opex rates are falling. Profits are booming.
This isn’t a fad. It’s a sign of the times, meaning that Lululemon stock is a long-term winner. But, healthy long-term fundamentals do not guarantee near-term LULU price gains.
Lululemon Stock Will Hit Some Valuation Friction Here
To be clear, Lululemon is a winner, given robust growth trends and secular growth tailwinds. But, winning is already largely priced into LULU stock, and that may create some valuation friction for this stock in the near to medium term.
The long-term growth trajectory for Lululemon is healthy. This company did $3.3 billion in revenue last year. Nike is a $40 billion revenue company. So, the runway for Lululemon to keep growing at a healthy rate is quite long and promising.
But, revenue growth is projected to slow, mostly due to tougher laps and slowing global economic expansion. For both next quarter and next year, revenues are projected to rise in the low- to mid-teens level while comps are expected to rise by low double digits. That is a pretty significant slowdown from today’s 20%-plus revenue growth and high teens comparable sales growth levels. But, it’s also more sustainable for an athletic apparel retailer in a single-digit growth industry.
As such, low double-digit growth is likely the new normal. That growth, coupled with continued gross margin expansion and opex leverage, should drive Lululemon EPS toward $11 by fiscal 2025. Based on a Nike-average 25x forward multiple, that equates to a fiscal 2024 price target for LULU stock of $275. Discounted back by 10% per year, that implies a reasonable fiscal 2019 price target of $170.
That’s where LULU stock trades today. Fiscal 2019 just started. As such, near- to medium-term upside is capped by a full valuation.
Bottom Line on LULU Stock
Lululemon stock is a long-term winner, powered by the company’s winning attributes in a secular growth athletic apparel market. But, LULU stock has come very far, very fast, and the valuation now appears full. Consequently, caution is warranted going forward, on the basis on valuation alone.
As of this writing, Luke Lango was long LULU and NKE.
