Why Lululemon (LULU) Stock Is a Strong Buy

Shares of Lululemon LULU have skyrocketed over the last year as the company regains its strong footing in the seemingly ever-growing athleisure market. So let’s see why the yoga apparel giant that is grabbing market share from giants like Nike NKE and Adidas ADDYY looks like a strong buy stock at the moment.

Recent Performance & Industry Overview

Lululemon’s first-quarter revenue climbed by 25% from the year-ago period to touch $616.32 million, which crushed our Zacks Consensus Estimate. The apparel company also topped quarterly earnings estimates. More importantly, comparable store sales popped by 6% and e-commerce sales soared 60%.

The company's quarterly e-commerce revenues reached $157.8 million, or over 24% of total revenue.  Lululemon’s gross margin also popped by over 3% to hit 53.1%. Investors should note that the company operates a relatively high margin business compared to other apparel players since it isn’t a wholesaler and mostly operates its own stores and e-commerce.

Lululemon’s international revenues climbed by 53%, while its revenues in Asia skyrocket over 100%. The company still operates most of its 411 stores in the U.S. and Canada, but the North American-based company closed the quarter with 11 stores in Asia. Going forward, growth in Asia will likely be essential, especially since it faces competition in North America not only from Nike, Adidas, Under Armour UAA, and Puma, but also from up-and-comers and direct competitors such as Outdoor Voices.

Investors will want to pay close attention to North America since Nike returned to growth in its home market during its most recent quarter after nearly a year of declining sales. Lululemon’s continued digital push is also vital, with both Nike and Adidas rapidly expanding their e-commerce portfolios through multiple apps, online portals, and partnerships with giants such as Amazon AMZN, Chinese e-commerce power JD.Com JD, and Facebook FB.

The yoga and athletic apparel firm today sells a wider range of offerings for women, men, and girls. Lululemon is not a necessarily a direct competitor to the sportswear giants. But since the athleisure—athletic clothing worn outside of workout settings—is one of the only growth sectors in the industry, Lululemon needs to continue to innovate and expand.

Performance & Valuation

Now that we have covered Lululemon’s most recent results and its industry, let’s take a quick look at its recent stock price performance and valuation picture. Shares of LULU are up roughly 98% over the last five years, which outpaces the S&P 500’s 70% climb as well as the apparel industry’s 56% average. Yet, most of that growth comes within the last year, with its stock price up roughly 120%.

 

LULU’s recent run has made its current valuation picture appear a bit stretched at the moment. The company’s stock is currently trading at 36.9X forward 12-month Zacks Consensus EPS estimates, which marked a significant premium compared to its industry’s 21.5X.

Further, Lululemon stock has traded as low as 22X over the last year, with a one-year median of 26.4X and is currently trading at its year-long high—LULU is also currently trading right around its highest earnings multiple over the last five years.

Growth Outlook

With that said, investors clearly have found reason to pay a premium for LULU stock compared to the industry for almost three straight years. Recently, this might be based on the company’s growth prospects.

Our current Zacks Consensus Estimates are calling for Lululemon’s current quarter revenues to climb by roughly 15% to hit $668.25 million, while its top line is expected to surge by over 16% to hit $3.08 billion for the full-year.

Meanwhile, its earnings growth looks even better, with its adjusted EPS figure expected to expand by 26% to hit $0.49 per share this quarter. Lululemon’s full-year earnings are expected to climb by 24% to hit $3.22 per share.

Better still, the company has experienced a ton of positive earnings estimate revision activity within the last 60 days. Lululemon has earned 13 upward earnings revisions against zero downgrades for its current quarter, along with 15 for the full-year, against just one downward change—as well as 14 revisions for fiscal 2019, with 100% agreement to the upside.

Lululemon’s strong positive earnings revision activity helps it earn its Zacks Rank #1 (Strong Buy). Therefore, the stock might be worth considering even at its new high.

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