Lululemon Growth Strategy Gains Traction, Guidance Is Raised

Lululemon Raises Guidance Twice In A Month

Lululemon (LULU) just raised its 4th quarter guidance and shares are moving higher on the news. The company says strong holiday sales were much better than expected. The comps are going to run in the mid to high teens and deliver revenue well above consensus estimates. The prior guidance of $1.315B to $1.300B is replaced with a range of $1.370B to $1.380 billion. EPS is now expected in the range of $2.22 to $2.25 versus the consensus $2.15 and the previous range of $2.10 to $2.13.

This is the second time the company has raised guidance in just over four weeks. Sales had been accelerating going into the holiday season so it's not a surprise. Wedbush predicted Lululemon would raise guidance a couple of weeks ago due to sales momentum and tight inventories but the news goosed the market anyway. Shares are up more than 3.0% and trading at a new high. 

Third Quarter Results Were Robust, Tailwinds Are Present

Lululemon last reported earnings in early December and blew past estimates. Comps rose 16% for the quarter, more than three times the expected rate, with notable strength in online sales and men's wear.

Lululemon’s direct-to-consumer segment grew 29% in the 3rd quarter and that pace is not expected to slow in 2020. Other brands, like Nike, are having great success competing with Amazon for online market share so it is smart for Lululemon to follow suit. With online sales as a segment of business up 160 bps to 26.9% in the 3rd quarter, investors can expect to see Lululemon focus on the segment long into the future.

Much of the growth in brick-and-mortar and direct-to-consumer is due to strength in the core segment, ladies apparel, but not all. Lululemon began to shift into men’s apparel not too long ago and seen tremendous results because of it. Revenue in the men’s category grew 38% YOY and reached a new high in the 3rd quarter. Digging a little deeper, there were sub-segments of men's that did even better. Sales of men's outer-wear increased by 100%.

CEO Calvin MacDonald, 3Q conference call

“These results keep us firmly on track to deliver on our Power of Three growth plan as we discussed at our Analyst Day earlier this year. As you'll recall, our five-year vision details our path to grow our core business in the low double-digits annually, while also doubling our men's, doubling our digital and quadrupling our international businesses by the end of 2023.”

 

To that end, Lululmenon just announced the addition of Nikki Neuberger to the team. She will be taking on the role of Chief Brand Officer. In that role, she will be responsible for communicating the company’s brand and leading global marketing efforts. Neuberger comes to Lululemon from Uber Eats where she’s been the last two years. Ms. Neuberger also served at Nike in a similar role for many years.

Lululemon: Going Parabolic Is Great For Owners But Not For Buyers

The technical outlook for Lululemon is fantastic if you already own the stock. The share price has risen 120% in just over a year and can be described as “going parabolic”. At the current rate of increase, share prices are moving virtually straight up and show no signs of slowing down. While great for those who already own Lululemon this is, however, a condition that makes it very hard to be a new buyer. Price just looks high and there is no guarantee a pullback will form.

On a valuation basis, Lululemon is not that highly valued relative to other sports/apparel companies. Trading at nearly 50X forward earnings, the market is pricing in quite a bit of revenue growth but so far, the company has been able to deliver it. Nike trades closer to 30X earnings but it’s a shoe company and well out of its explosive growth phase. A closer comparison is Under Armor, also trading at 50X forward earnings, and also expecting solid results in 2020.

Should you be a buyer of Lululemon? Only if you want to participate in the company’s growth story and can handle the volatility of owning a high-profile growth-name like Lululemon. Share prices are likely to move higher over the long-term, the forecast is bullish and tailwinds are present, but what happens between now and then will come down to the market. Over zealous traders and a miss on an earnings statement could send this high-flying stock crashing back to earth. Cautious investors may want to start small and build their positions over time.