Report
David Swartz
EUR 850.00 For Business Accounts Only

Morningstar | Narrow-Moat Lululemon Opens Fiscal 2019 in Good Shape; Shares Overvalued

Narrow-moat Lululemon’s results in fiscal first-quarter 2019 slightly exceeded our forecast. The firm’s reported EPS of $0.74 beat our forecast of $0.71 because of a reduced share count from repurchases ($163.5 million in the quarter) and a lower tax rate, which was a result of a large stock-based compensation deduction (26.4% tax rate versus our forecast of 28.0%). Lululemon’s operating income of $128.8 million in the first quarter almost matched our forecast of $129.0 million. The firm reported solid 14% total same-store sales in the quarter owing to the strength of full-price sales in key categories such as women’s leggings and joggers. Because Lululemon sells nearly all its products through company-owned stores and e-commerce, we think it has almost total control over pricing and marketing. While other apparel manufacturers and retailers struggled in the first half of 2019 and resorted to heavy discounting, we believe Lululemon’s powerful sales model and brand popularity make it an outlier. We believe the firm can charge premium prices and hold them. Lululemon reported an 8% increase in store traffic in the first quarter, far outpacing many mall-based apparel retailers experiencing negative traffic trends. While the success of Lululemon’s products have attracted many competitors, Lululemon remains the premier brand in its core categories. We expect to increase our fair value estimate of $129 for Lululemon by a low single-digit percentage based on first-quarter results. We view Lululemon, up sharply since December, as overvalued at current levels.

Lululemon’s “power-of-three” strategy (innovation, market expansion, and multiple sales channels) is sound but in its early stages. Lululemon’s stores are unusually productive. Still, it trails some competitors in areas such as data collection, international growth, and e-commerce. Lululemon, however, appears to be making progress on all three fronts. Its e-commerce business grew 35% in the first quarter and remains on track to reach our forecast, that it will comprise 40% of sales by 2024. E-commerce can also be enhanced by improved data collection. Further, we believe Lululemon must expand beyond women’s yoga pants into other women’s apparel categories and menswear to meet our forecast of continuing double-digit sales growth through at least 2023. We view Lululemon’s nascent loyalty programme (currently being tested in three markets) as important in this regard. In terms of Lululemon’s international growth we view China, where it plans to open 10 to 15 stores in 2019, as the key market because it is the second-largest athletic apparel market in the world.
Underlying
Lululemon Athletica Inc

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.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
David Swartz

Other Reports on these Companies
Other Reports from Morningstar

ResearchPool Subscriptions

Get the most out of your insights

Get in touch