Lululemon Earnings: On Track to Meet Expectations Despite Slowdown In Americas

Key Morningstar Metrics for Lululemon Athletica

• Fair Value Estimate: $285.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

What We Thought of Lululemon Athletica’s Earnings

After dropping 40% since the beginning of the year, Lululemon Athletica’s LULU shares rose 10% in June 5 postmarket trading, as its first-quarter results surpassed prior guidance and our estimates. The firm lifted its 2024 EPS outlook to $14.27-$14.47 from $14.00-$14.20, which should lead us to increase our $285 fair value estimate by a low-single-digit percentage.

However, of some concern, sales growth in the Americas (73% of the total) was well below typical double-digit rates; comparable sales in the region were flat. The company cited some shortages of women’s merchandise, but we also think strong sales of bags over the past year may have masked a slowdown in core leggings. Competition in this category is nothing new, but we believe it is intensifying.

Lululemon matched our estimate with 10% sales growth in the quarter. Sales rose 45% in mainland China (14% of the total) and 27% in the rest of the world (13%) on comparable sales growth rates above 20% and store openings for each. We think Lululemon’s expansion opportunities in North America are limited, but we also believe it can add hundreds of stores to its current base of 127 in mainland China. We think it is increasingly seen as a premium brand and market leader in the region. However, it has also been a challenging market for non-Chinese activewear brands for political and other reasons in recent years. In our model, Lululemon’s sales outside North America reach half its total sales in about 10 years.

Lululemon’s 57.7% gross margin in the quarter beat our estimate by 20 basis points, while its 19.6% operating margin was 80 basis points better. Its $2.54 in EPS was $0.15 above our estimate. In the long run, we forecast the firm can hold current gross margins of about 58% and operating margins of 22%-23%. Given competitive pressures and the likelihood of slower sales growth, we do not anticipate much improvement in these margins.