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Lululemon's (NASDAQ:LULU) Q4 Earnings Results: Revenue In Line With Expectations But Stock Drops


Full Report / March 21, 2024

Athletic apparel and accessories retailer Lululemon (NASDAQ:LULU) reported results in line with analysts' expectations in Q4 CY2023, with revenue up 15.6% year on year to $3.21 billion. On the other hand, next quarter's revenue guidance of $2.19 billion was less impressive, coming in 3.2% below analysts' estimates. It made a GAAP profit of $5.29 per share, improving from its profit of $0.94 per share in the same quarter last year.

Lululemon (LULU) Q4 CY2023 Highlights:

  • Revenue: $3.21 billion vs analyst estimates of $3.20 billion (small beat)
  • EPS: $5.29 vs analyst estimates of $5.03 (5.1% beat)
  • Revenue Guidance for Q1 CY2024 is $2.19 billion at the midpoint, below analyst estimates of $2.26 billion
  • Management's revenue guidance for the upcoming financial year 2024 is $10.75 billion at the midpoint, missing analyst estimates by 1.7% and implying 11.8% growth (vs 19.1% in FY2023)
  • Gross Margin (GAAP): 59.4%, up from 55.1% in the same quarter last year
  • Same-Store Sales were up 12% year on year
  • Market Capitalization: $59.19 billion

With roots in yoga and hockey, Lululemon (NASDAQ:LULU) is a designer, distributor, and retailer of athletic apparel and accessories for men and women.

Lululemon was founded in 1998 to provide stylish athletic wear that supports an active and healthy lifestyle. The brand emerged from the growing demand for functional yet fashionable fitness apparel, starting with yoga wear and expanding to a wide range of athletic and leisure clothing.

The company's offerings encompass athletic wear, including yoga pants, running gear, and workout accessories alongside lifestyle apparel. Lululemon differentiates itself through its emphasis on technical fabrications and a strong community focus. It addresses the gap in the market for premium, well-crafted athletic apparel that can transition seamlessly from the gym to daily life. The brand has cultivated a loyal customer base through its products, customer support (such as free alterations), and community events.

Lululemon's revenue stems from its direct-to-consumer and wholesale channels, encompassing physical retail stores and an e-commerce platform. Customers can also download the company's mobile app to track purchases and support orders.

Apparel, Accessories and Luxury Goods

Within apparel and accessories, not only do styles change more frequently today than decades past as fads travel through social media and the internet but consumers are also shifting the way they buy their goods, favoring omnichannel and e-commerce experiences. Some apparel, accessories, and luxury goods companies have made concerted efforts to adapt while those who are slower to move may fall behind.

Competitors in the athletic apparel industry include Nike (NYSE: NKE), Under Armour (NYSE:UA), and Columbia Sportswear (NASDAQ:COLM).

Sales Growth

A company’s long-term performance can give signals about its business quality. Any business can put up a good quarter or two, but many enduring ones muster years of growth. Lululemon's annualized revenue growth rate of 23.9% over the last five years was exceptional for a consumer discretionary business.

Lululemon Total Revenue

Within consumer discretionary, a long-term historical view may miss a company riding a successful new product or emerging trend. That's why we also follow short-term performance. Lululemon's annualized revenue growth of 24% over the last two years aligns with its five-year revenue growth, suggesting the company's demand has been stable. 

We can dig even further into the company's revenue dynamics by analyzing its same-store sales, which show how much revenue its established locations generate. Over the last two years, Lululemon's same-store sales averaged 18.8% year-on-year growth. Because this number is lower than its revenue growth, we can see the opening of new locations is boosting the company's top-line performance.

Lululemon Year-On-Year Same-Store Sales Growth

This quarter, Lululemon's year-on-year revenue growth clocked in at 15.6%, and its $3.21 billion of revenue was line with Wall Street's estimates. The company is guiding for revenue to rise 9.3% year on year to $2.19 billion next quarter, slowing from the 24% year-on-year increase it recorded in the same quarter last year. Looking ahead, Wall Street expects sales to grow 13.5% over the next 12 months, a deceleration from this quarter.

Operating Margin

Operating margin is a key measure of profitability. Think of it as net income–the bottom line–excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Lululemon has been a well-managed company over the last eight quarters. It's demonstrated it can be one of the more profitable businesses in the consumer discretionary sector, boasting an average operating margin of 19.5%. Lululemon Operating Margin (GAAP)

This quarter, Lululemon generated an operating profit margin of 28.5%, up 17.2 percentage points year on year.

Over the next 12 months, Wall Street expects Lululemon to become more profitable. Analysts are expecting the company’s LTM operating margin of 22.2% to rise to 23.2%.

EPS

Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability and efficiency of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions. Lululemon EPS (GAAP)

Over the last five years, Lululemon's EPS grew 207%, translating into an astounding 25.2% compounded annual growth rate. This performance is higher than its 23.9% annualized revenue growth over the same period. There are a few reasons for this, and understanding why can shed light on its fundamentals. A five-year view shows that Lululemon has repurchased its stock, shrinking its share count by 4.4%. This has led to higher per share earnings. Taxes and interest expenses can also affect EPS growth, but they don't tell us as much about a company's fundamentals.

In Q4, Lululemon reported EPS at $5.29, up from $0.94 in the same quarter a year ago. This print beat analysts' estimates by 5.1%. Over the next 12 months, Wall Street expects Lululemon to grow its earnings. Analysts are projecting its LTM EPS of $12.21 to climb by 18.5% to $14.46.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money the business raised (debt and equity).

Lululemon's five-year average ROIC was 48.3%, placing it among the best consumer discretionary companies. Just as you’d like your investment dollars to generate returns, Lululemon's invested capital has produced excellent profits.

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, Lululemon's ROIC over the last two years averaged 8.1 percentage point decreases each year. The company has historically shown the ability to generate good returns, but they have gone the wrong way recently, making us a bit conscious.

Key Takeaways from Lululemon's Q4 Results

It was encouraging to see Lululemon slightly top analysts' revenue and EPS expectations this quarter. The company's growth was driven by a 12% increase in its same-store sales, with American stores growing 7% and international stores growing 44% on a constant currency basis. Despite the beats, its full-year revenue and earnings guidance fell short of Wall Street's estimates, causing the stock to drop. The company is down 8.8% on the results and currently trades at $437 per share.

Is Now The Time?

Lululemon may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We think Lululemon is a solid business. First off, its revenue growth has been exceptional over the last five years. And while its low free cash flow margins give it little breathing room, its stellar ROIC suggests it has been a well-run company historically. On top of that, its EPS growth over the last five years has been fantastic.

Lululemon's price-to-earnings ratio based on the next 12 months is 33.3x. There are definitely things to like about Lululemon and there's no doubt it's a bit of a market darling, at least for some investors. But when considering the company against the backdrop of the consumer discretionary landscape, it seems there's a lot of optimism already priced in. We wonder if there are better opportunities elsewhere right now.

Wall Street analysts covering the company had a one-year price target of $504.05 per share right before these results (compared to the current share price of $437).

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