Morningstar | Loyal Customers Give Narrow-Moat Lululemon an Edge as Athleisure Grows; FVE Increased. See Updated Analyst Note from 29 Apr 2019
We maintain our narrow moat rating on Lululemon but raise our fair value estimate to $129 from $82. Our narrow moat rating is based on Lululemon’s intangible brand asset. We think the firm benefits from the athleisure trend and, despite competition from rivals like wide-moat Nike and no-moat Gap’s Athleta, will continue to achieve premium pricing due to its strong brand and the quality of its merchandise. We think Lululemon will successfully execute the “Power of Three†(innovation, e-commerce, and market expansion) five-year plan laid out at its recent investor event.Our increased fair value estimate is mainly due to our raised sales growth expectations for Lululemon’s company-operated stores and, especially, e-commerce. We had previously forecast Lululemon would operate 600 stores in 2026, but we now think it will reach that number by the end of 2021 and operate nearly 1,000 stores worldwide by the end of 2028. As Lululemon opens stores, it is also expanding its digital capabilities. We forecast its e-commerce revenue will increase to $4.5 billion in 2028 from $1.1 billion in 2019. We had previously forecast $2.1 billion in e-commerce revenue in 2027. Overall, we have increased our average annual revenue growth on Lululemon over the next decade to 11% from 9%. We now forecast Lululemon will reach $6 billion in sales in 2023, four years earlier than our previous view.
We believe Lululemon can increase its gross margins on good pricing and lower costs as it optimizes its supply chain. We forecast its gross margins will gradually improve to 57% from 55% over the next decade. We had previously forecast Lululemon’s gross margins to decline to 53% in 2019. We also have raised our view on the firm’s average annual operating margins over the next 10 years to 23% from 21%. Finally, we have reduced our long-term tax rate view on Lululemon to 28% from 30% as it expands in lower-tax territories.
We view Lululemon, up sharply this year, as overvalued at current levels.
lululemon athletica is a designer, distributor, and retailer of athletic apparel. Co.'s athletic apparel is marketed under the lululemon and ivivva brand names. Co. provides a line of apparel and accessories for women, men and female youth. Co.'s apparel assortment includes items such as pants, shorts, tops, and jackets designed for healthy lifestyle and athletic activities such as yoga, running, training, other sweaty pursuits, and athletic wear for female youth. Co. also provides fitness-related accessories. Co. primarily conducts its business through two channels: company-operated stores and direct to consumer. As of Jan 28 2018, Co. operated 404 stores.
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