LULU’s Investment Thesis Remains Uncertain As More Pain Is Likely In The Near-Tern
Lululemon (NASDAQ:NASDAQ:LULU) had greatly benefited from the COVID-19 pandemic indeed, where remote work had been the norm in 2020/ much of 2021 along with the emphasis on healthy living, boosting the demand for athleisure attires.
This had already resulted in its excellent revenue growth at a CAGR of +24.7% and adj EPS of +26.9% between FY2019 and FY2023, a feat that was made even more impressive by its inherent lack of debts.
At the same time, LULU’s bottom-line tailwinds were mostly attributed to its asset light strategy with it not “owning or operating any manufacturing facilities,” while choosing to rely on third party manufacturers in countries with lower labor costs, such as Vietnam, Cambodia, Sri Lanka, Indonesia, and Bangladesh.
This further underscored its successful underdog story, with the market naturally rewarding the stock with an impressive 4Y return of +161.5%, well outperforming the wider market at +76.5%.
Unfortunately, LULU’s high growth streak seems to have ended as the uncertain macroeconomic outlook continues, with the management offering an underwhelming FY2024 revenue guidance of $10.75B (+11.8% YoY) and adj EPS guidance of $14.60 at the midpoint (+14.3% YoY).
This is compared to the historical top/ bottom line growth at a CAGR of +21.2%/ +27.2% between FY2016 and FY2023, respectively.
This also builds upon LULU’s decelerating growth trend observed since early 2024, with the same demand headwind affecting Nike (NKE) as seen in the underwhelming FY2024 guidance, prompting the latter to embark on headcount reductions and product innovations.
The silver lining to LULU’s investment thesis is in its extremely healthy balance sheet, with a growing net cash position of $2.24B (+105.5% QoQ/ +94.7% YoY) and a reasonable inventory levels of $1.32B (-20.4% QoQ/ -8.3% YoY) in the latest quarter.
This is on top of the more than decent shareholder returns, with 0.95M or 0.07% of its float already retired over the LTM, and 3.9M/ 2.9% since FY2019, demonstrating the excellent use of $1.64B in Free Cash Flow generated in FY2023 (+401.6% YoY).
The Consensus Forward Estimates
As a result, it is unsurprising that the market has temporarily downgraded its consensus forward estimates, with LULU expected to chart an underwhelming top/ bottom line growth at a CAGR of +10.8%/ +11.9% through FY2026. This is compared to the previous estimates of +12.4%/ +13.2%, respectively.
LULU Valuations
And this is why we believe that LULU has been drastically discounted at FWD EV/ EBIT valuations of 16.16x and FWD P/E valuations of 23.07x, compared to its 1Y mean of 22.16x/ 31.22x and 3Y pre-pandemic mean of 22.08x/ 32.58x, respectively.
When we compare LULU to its Sports Consumer Discretionary peers, such as NKE at 21.61x/ 24.68x, adidas AG (OTCQX:ADDYY) at 56.89x/ 63.97x, and On Holding (ONON) at 41.57x/ 43.27x, respectively, it appears that the discount is justified indeed.
This is especially since LULU’s top/ bottom line growth projections pale in comparison to ADDYY at +8.3%/ +104% and ONON at +25.9%/ +55.1%, while nearing NKE’s at +3%/ +11.3% through FY2026, respectively.
So, Is LULU Stock A Buy, Sell, or Hold?
LULU 4Y Stock Price
And this is also why LULU has lost much of its 2023 gains while drastically losing -37.4% of its stock prices since the December 2023 peak.
Thanks to the deep pullback, the stock finally trades near to our fair value estimates of $294.60, based on the FY2023 adj EPS of $12.77 and the discounted FWD P/E valuations of 23.07x.
Based on the consensus FY2026 adj EPS estimates of $17.88, there appears to be an excellent upside potential of +27.6% to our long-term price target of $412.40 as well.
LULU Short Interest
While LULU was previously highly shorted at approximately 6.2% of its overall float in Q4’23, things have moderated to 3.1% at the time of writing.
However, with the management set to report its FQ1’24 earnings call on June 05, 2024, it is undeniable that there may be moderate volatility in the near-term, especially worsened by the sudden departure of its Chief Product Officer and the new team reshuffling across merchandising, brand, and product operations.
At the same time, the management has previously guided FQ1’24 revenues of $2.19B (-31.7% QoQ/ +9.5% YoY) and adj EPS of $2.375 at the midpoint (-55.1% QoQ/ +4.1% YoY), missing the consensus estimates of $2.26B and $2.59, respectively, further underscoring its uncertain near-term prospects.
With LULU also consistently charting lower lows while trading well below its 50/ 100/ 200 day moving averages and breaking through numerous support levels, it is painfully apparent that bullish support has yet to materialize.
With the athleisure market competition intensifying, the interest rates likely to stay higher for longer, and the Americans recording higher credit card balances as more borrowers fall behind on their payments in Q1’24, we believe that we may see a further slowdown in consumer spending in the intermediate term, triggering further uncertainties in LULU’s FY2024 prospects.
As a result of the uncertainty, we believe that it may be more prudent to wait for more clarity from the upcoming earnings call, with us initiating a Hold (Neutral) rating for now.
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