Related content in my book
I have introduced the company Lululemon (ticker: LULU) in my book, and I will not repeat the content in the book. Investors are invited to refer to the introduction in the special section of my book:
- In section 5-2 of the book “The Rules of 10 Baggers“, pages 227-229: This entire section has a special introduction to the company Lululemon.
- In subsections 3-5 of the book “The Rules of 10 Baggers“, pages 157-158.
Introducing Lululemon
While Nike (ticker: NKE ) is often considered the king of athletic apparel, a relatively new and smaller competitor, Lululemon, has proven to be an excellent investment since its 2007 IPO. Lululemon is often overshadowed by its larger rivals in the news, but as its stock performance shows, ignoring Lululemon in favor of Nike could be a mistake for investors.
Considering its history of gaining market share and delivering consistent profit growth, Lululemon already shows great potential as an investment opportunity. This article will examine the favorable market trends driving the company’s positive fundamentals and explain how its business model can maximize these trends. While Lululemon stock has long traded at a premium, the stock still has long-term growth potential.
Direct to Consumer Sales
Lululemon’s direct-to-consumer business model allows the company to control most of its sales channels. In the fourth quarter of 2022, brick-and-mortar store sales were $1.1 billion, up 15% year-over-year.
Meanwhile, e-commerce sales accounted for nearly 52% of the company’s total revenue, with sales of $1.4 billion, up 37% year-over-year. Lululemon’s wholesale revenue accounts for only 8% of its total revenue, and more than 90% of sales are sold directly to consumers through company-owned stores or online websites.
Control over distribution greatly affects a company’s ability to earn higher profit margins by eliminating middlemen. The growth in e-commerce sales has also been a boon for Lululemon, allowing it to thrive in difficult times. Beyond simply supporting the company’s online presence, the pandemic has accelerated Lululemon’s goal of doubling its e-commerce business by 2023, a milestone three years ahead of schedule.
Gain market share
Lululemon’s extraordinary progress to date is a testament to its enormous growth potential in the years to come. According to Statista, the global sportswear market is expected to witness substantial growth during the period 2021-2028. According to Statista, the global sportswear market will be worth about $319.4 billion by 2022 and is expected to soar to more than $450 billion by 2028. Despite Lululemon’s impressive growth so far, there’s still plenty of room to grow.
One of the key factors in Lululemon’s ability to grab market share is its distribution control. Its tight control over its sales path has helped the company maintain a strong grip on its brand, which in turn has increased its weight with customers. Lululemon gained 2.3% U.S. market share in the fourth quarter of 2022, despite a 5% decline in revenue in the activewear category. The decline could be a sign that customers are switching to Lululemon’s premium brands rather than other rivals.
Lululemon’s innovative business model is another factor contributing to its growth. The company is known for its unique customer experience, including a personalized way to shop, high-quality products and exceptional customer service. This has helped Lululemon develop a loyal customer base and a strong brand image. Lululemon’s ability to adapt to changing market trends keeps the company ahead.
Lululemon’s growth has also been largely driven by its expansion into new markets, especially in Asia and Europe. The company has been gradually increasing its presence in the international market. This has helped Lululemon develop new customer segments and diversify its revenue streams.
Why can profits continue to grow?
When comparing Lululemon to Nike, it’s clear that Lululemon outperforms Nike on several key metrics. Over the past decade, Lululemon’s sales have grown by an average of nearly 20% per year. This pace is significantly higher than Nike’s average annual revenue growth rate of 8.7% over the same period. In fact, over the past five-year period, Lululemon’s average EPS growth has been an impressive 25.80% per year compared to Nike’s 7.30%.
This trend is also reflected in Lululemon’s EPS growth rate, which has consistently outperformed Nike over the past decade. Over the past three years, Lululemon’s average EPS growth excluding NRIs has been 10.70%, compared to Nike’s 14.60%. Over the past five years, Lululemon’s average EPS growth excluding NRIs has been 27.1% per year, compared with 15% per year for Nike. Over the past 10 years, Lululemon’s average EPS growth, excluding NRIs, has been 17% per year, compared with 9.3% per year for Nike.
The past is no guarantee of future results, but considering that Nike’s market cap is still more than four times that of Lululemon, it’s easy for me to be optimistic about Lululemon’s growth.
Unreasonable valuation
Lululemon’s fiscal fourth-quarter earnings report showed impressive revenue and earnings growth, with revenue up 30.3% to $2.77 billion and earnings per share of $4.40, beating expectations and sending shares up 13%. Total comparable sales rose 27%, comparable store sales rose 15%, and direct-to-consumer net revenue rose 37%. While inventories are up 50% from the same period in 2021, that’s still below the 85% surge in the fiscal third quarter.
Chief Financial Officer Megan Frank expressed confidence in the company’s performance, saying it was balanced across product categories, channels and regions. Lululemon is optimistic about the future of continued growth and long-term value for stakeholders, and expects fiscal 2023 earnings per share of $11.50 to $11.72 on sales of $9.3 billion to $9.41 billion, above analysis teacher’s expectations.
Despite its strong performance, Lululemon shares are now considered overvalued, with a P/E ratio of 54.54%. This valuation is even higher than Nike’s P/E ratio of 34.65.
Economic conditions remain worrisome despite signs that the rate-hike cycle is coming to an end. Paying a premium may not be a wise choice in this case. Despite Lululemon’s strong performance and growth prospects, investors should exercise caution and consider the company’s valuation before making an investment decision.
Investors should be wary of frothy valuations
Lululemon has experienced impressive revenue and earnings growth over the past decade, outpacing its archrival Nike. However, even after the burst of the market bubble fueled by the new crown epidemic, the stock is still overvalued. As such, current valuations may be stretched for value-conscious investors.
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