Morningstar | Lululemon’s Shares Rise on Improved 4Q Guidance; Shares Overvalued
Narrow-moat Lululemon’s shares jumped approximately 6% after a press release issued early Jan. 14 announcing that it raised its revenue and profitability outlook for the fourth quarter and full-year 2018 due to strong momentum in the business through the holiday season. Management ticked up its fourth-quarter sales outlook (to $1.14 billion-$1.15 billion from $1.115 billion-$1.125 billion prior and against our $1.07 billion estimate) and diluted earnings per share expectations (to $1.72 to $1.74, up from $1.64 to $1.67 and against our $1.64 estimate). We expect to slightly raise our top-line and profitability outlook to incorporate further strength in the e-commerce business and holiday sales. After digesting the news and taking into account the additional cash generated since our last update, we expect to raise our $77 fair value estimate by a mid-single-digit percentage. However, our longer-term outlook of high-single-digit combined comp growth and low-20s operating margin on average over the next five years remains intact. As such, we continue to view the stock as rich and would suggest investors avoid building a position in the name at the current valuation.We continue to believe that Lululemon participates in a highly competitive apparel market with multiple strong competitors, many of which have large cash reserves and a strong supply chain for quick R&D, product development, and geographic expansion. As a result, we think spending will be elevated over the next few years due to investments (such as e-commerce capabilities, international expansion, and greater marketing campaigns) required to stay relevant in a quickly changing athleisure market.
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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