MemeStocking

They say, a good margin business is a good business to invest in.

So let’s find out if Lululemon’s gross margins can make it interesting stock to analyse even though it has been tanking.

Lululemon (LULU) is a yoga-inspired athletic apparel company that creates lifestyle components. The company designs, manufactures and distributes athletic apparel and accessories for women and men. It’s line of apparel assortment, includes fitness pants, shorts, tops and jackets designed for healthy lifestyle and athletic pursuits, such as yoga, training etc . Its fitness-related items comprise an array of accessories like bags, socks, underwear, yoga mats, instructional yoga DVDs, water bottles and other equipments.

The company sells its products primarily in North America through a chain of corporate-owned and retail stores, outlets and warehouse sales, independent franchises, and a network of wholesale accounts. It also has an e-commerce site with an aim to rapidly expand its online business.

Fair value debate:

• LULU ($378.06) is undervalued by 20.54% relative to its estimated Fair Value price of $475.81 based on Discounted Cash Flow (DCF) modelling
• However there is another way to look at it- Considering the Price-to-Earnings (P/E) ratio, Lululemon looks pretty overvalued when compared with the sub-industry and the S&P 500. The stock has a trailing 12-month P/E of 31.36X compared with 13.89X for the industry and 21.08X for the S&P 500. Its trailing 12-month P/E ratio is above the median level of 30.65X and below the high level of 37.04X scaled in the past year.

Price to Earnings:

• LULU is poor value based on its earnings relative to its share price (30.91x), compared to the US Apparel Retail industry average (26.59x)
• LULU is good value based on its earnings relative to its share price (30.91x), compared to the US market average (43.77x)

Profit margin

• LULU's Earnings (EBIT) of $2.18B can safely cover interest payments on company debt ($1.40B)
• LULU's profit margin has increased (+5.6%) in the last year from (10.5%) to (16.1%)

Assets and liabilities

• LULU's short-term assets ($4.06B) exceed its short-term liabilities ($1.63B)
• LULU's short-term assets ($4.06B) exceed its long-term liabilities ($1.23B)

Cash Flow

• LULU's operating cash flow ($2.30B) is sufficient to service the company's debt ($1.40B)

Profitability and margins

• LULU outperforms both the industry average and the S&P 500 in terms of profitability margins. With a gross margin of 58.3%, an operating margin of 23.0%, and a net margin of 16.1%, LULU demonstrates superior efficiency in managing its costs and expenses compared to the industry and broader market. This suggests LULU has a strong pricing strategy, cost control, and operational efficiency.
• The company's returns—Return on Assets (ROA) at 24.4%, Return on Equity (ROE) at 36.6%, and Return on Invested Capital (ROIC) at 31.5%—are all substantially higher than those of the industry and S&P 500, indicating LULU's effectiveness in utilsiing its assets and equity to generate earnings and its superior performance in investing capital relative to peers and the broader market

Analyst forecast of stock performance

• Minimum Forecast – Can drop to as low as $300.00, which would represent a decrease of 20.65% from the current price.
• Average Forecast – Mean projection by analysts is $494.72, reflecting an increase of 30.86% from the current price. This is the consensus average price target.
• Maximum Forecast- Stock can rally as high as $570.00, showing a significant potential increase of 50.77% from the current price

Revenue Forecast

• Short-term Revenue Growth – The average 1-year forecast predicts revenue to increase to $10.8 billion, which is a 12.07% rise from the current figure
• Long-term Revenue Growth – Average 2-year forecast shows a 25.04% increase to $12.0 billion, and the 3-year forecast predicts a 38.09% rise to $13.3 billion. The range of estimates for January 31, 2027, is between $13.0 billion (low) and $13.5 billion (high), with a mean estimate of $13.3 billion

Revenue Growth Forecast

• LULU's revenues are forecast to grow faster (11.35% per year) than the US Apparel Retail industry average (6.68%)
• LULU's revenues are forecast to grow faster (11.35% per year) than the US market average (10.57%)

Earnings trend with stock price trend and consensus estimates

• Black line – historical stock price movement
• Blue dashed line – indicates the 12-month trailing EPS, a measure of the company's earnings per share calculated over the past 12 months at each given point
• Green dotted line – consensus estimate for the stock's future EPS

Some last thoughts. Yoga pants apparently rock.

• Lululemon's stock has surged 56.6% in a year due to continuous earnings beats and its successful 'Power of Three X2' growth strategy aiming for $12.5 billion revenue by 2026.
• The company predicts a 15% total net revenue CAGR from 2021 to 2026, expecting earnings growth to surpass revenue growth, underpinned by a strong financial foundation
• In-store sales thrive with a 9% year-over-year growth and enhanced omni-channel capabilities, while e-commerce is bolstered by investments in functionality and fulfillment, contributing to 18% revenue growth.
• Following stellar holiday sales, Lululemon raised its Q4 fiscal 2023 forecasts, signaling robust company performance and adaptability to consumer trends.

I am not a financial analyst , trader or a financial advisor. I curate analysis. Nothing I publish should be taken as investment trading or broking advice. The data I use is curated from various news sources and based on the date it's taken number's may change. Reader's should do their own analysis for the most up-to-date numbers.