Robert Manner
Funding Thesis
Final time I analysed Lululemon Athletica (NASDAQ:LULU), I talked about how the corporate has been managing its stock ranges with minimal affect to its revenue margins.
The corporate had one more beat-and increase quarter, because of the outstanding efficiency seen in its worldwide markets basically, and China specifically. On this article, I spotlight how the corporate’s worldwide progress and the launch of Lululemon Studio are greater than prone to offset any opposed affect from a possible slowdown within the U.S.
Lulu’s First Quarter Highlights
LULU had one more sturdy quarter, kickstarting the brand new monetary yr on a strong footing. Revenues got here in at $2 billion, up 24% year-over-year, comfortably beating analyst estimates by almost $76.5 million. Diluted EPS got here in at $2.28, beating estimates by $0.27.
The corporate additionally raised its steerage for FY23, with revenues now anticipated to come back in between $9.44 and $9.51 billion, nicely above the consensus estimate of $9.36 billion. Diluted EPS is now anticipated to be within the vary between $11.74 and $11.94, as soon as once more beating the consensus estimate of $11.60.
The expansion in income of its equipment division, up 67% year-over-year, was significantly noteworthy.
Lulu’s Neighborhood Based mostly Mannequin is Working as Evidenced from Development in China
Within the fourth quarter of FY22, LULU had posted a 30% year-over-year progress in China regardless of the Covid protocols in place. Within the newest quarter, with the Covid restrictions lastly lifted, the corporate had a blowout efficiency in China as revenues jumped 79% year-over-year.
The quantity of name consciousness, which the corporate has generated within the area, by leveraging its community-based mannequin is clearly paying off. The expansion in China was the most important issue behind the corporate’s 60% year-over-year gross sales progress in its worldwide markets.
With the corporate anticipated to open 30 to 35 shops within the worldwide markets in 2023, the vast majority of that are earmarked for China, LULU’s progress story outdoors North America seems to be removed from over.
Lululemon Studio Presents a New Gateway to Appeal to New Customers
A serious takeaway from LULU’s first quarter was the launch of the corporate’s digital app, Lululemon Studio. The platform affords U.S. customers entry to the corporate’s digital content material with out having to buy the corporate’s {hardware}. The membership plan, which prices $12.99 per 30 days, is an extra providing and is separate from the corporate’s free-to-join Necessities membership program.
Lululemon Studio ought to supply the corporate with an extra income and is prone to appeal to a complete new class of customers. The corporate has already had success with Necessities, which noticed its membership rely attain 8 million inside six months of its launch.
In response to Vantage Market Analysis, the health app market is forecast to develop, at a CAGR of 17.30%, to $21 billion by 2030. Whereas the Studio might not be the main participant on this class, it’s nonetheless anticipated to be a robust progress driver for LULU, in my view, given this class’s Complete Addressable Market (TAM). Furthermore, LULU is extra prone to leverage the information generated from Studio to drive innovation in its {hardware} division.
The corporate’s digital gross sales within the first quarter accounted for 42% of the overall income and the digital phase noticed site visitors bounce roughly 30% year-over-year. With Lululemon studio, the corporate has the power to drive the expansion of its digital division much more.
Valuation
|
Ahead P/E Strategy |
|
|
Worth Goal |
$438.00 |
|
Projected Ahead P/E A number of |
37x |
|
Projected FY23 EPS |
$11.84 |
Supply: Firm’s Q1 Earnings Launch, Refinitiv, and Creator’s Calculations
The corporate is presently buying and selling at a ahead P/E of 28x, in keeping with Refinitiv, which in my view, is just not costly given the truth that traditionally the corporate has traded at 37x. With LULU anticipated to see its diluted EPS develop almost 77% in FY23, I’ve assumed a ahead P/E of 37x since, in my view, the earnings progress justifies the premium a number of.
A ahead P/E of 37x and an FY23 EPS of $11.84, which is the midpoint of the corporate’s up to date steerage, ends in a worth goal of $438, which represents a 23% enhance from present ranges.
Threat Elements
The most important threat issue continues to be the macroeconomic uncertainties, which proceed to plague the retail sector.
Moreover, one of many main catalysts in my thesis is the longer term efficiency of Lululemon Studio. There’s the chance that the digital app fails to take off. Recall that the corporate has, previously, tried to launch a Peloton-like providing, via its acquisition of Mirror. The acquisition at present is nearly nugatory, so LULU does have a poor historical past with digital choices. As such, the longer term efficiency of Lululemon Studio must be monitored carefully.
Concluding Ideas
I proceed to love LULU. The China progress story is taking part in out remarkably, particularly now that Covid restrictions are eliminated and because of the corporate’s community-based mannequin. The launch of Lululemon Studio affords a possibility to draw new prospects and gives the corporate with one other income channel. From a valuation perspective, LULU continues to stay attractively priced regardless of the bounce seen submit the earnings launch.
General, it has been a powerful begin to the yr for LULU and primarily based on the takeaways from the corporate’s Q1 efficiency, the expansion nonetheless has legs to run.
