I am bullish on Lululemon Athletica (LULU) as it looks attractively priced relative to its historical averages, Wall Street analysts are bullish on it, and its average price target implies substantial upside potential.
Lululemon Athletica is a technical athletic apparel company that offers a long line of products for training, running, yoga, and other forms of athletics. The company was founded in 1998, and it’s headquartered in British Columbia, Canada.
Although the company formerly operated solely as a provider of yoga wear and, in particular, yoga pants, it has since expanded to offer a wide range of options that include personal care products, accessories, lifestyle apparel, and other athletics apparel.
In total, Lululemon Athletica has more than 500 stores around the globe, but it also offers its products through online platforms. It has been competing with several well-established companies in the industry.
Strengths
With a significant global footprint, Lululemon Athletica has created several long-term and loyal customers globally, which has enabled the company to compete against business giants such as Nike and Under Armour. The company offers products in unique styles, innovative features, and high-quality materials, which help Lululemon Athletica outshine several of its competitors in the market.
The customer-centric approach has equipped the company to offer products suitable for its target audiences and perform better in terms of sales and conversions. In addition to its well-trained staff, loyal customer base, and strong financial standing, the company has also garnered attention due to its focus on philanthropic work and community-centered marketing.
Recent Results
In Q3 2021, Lululemon Athletica’s total net revenue reached $1.5 billion, which was a 30% increase from the 2020 Q3 financial results. This massive increase was a result of 2020’s pandemic-related restrictions, which postponed most of the company’s operations.
The two-year CAGR for the net revenue reached 26%. The gross profit increased by 32% compared to Q3 2020 and reached $829.4 million in total. In Q3 2020, the gross profit was 57.2% of net revenues or $627.4 million in total. Compared to Q3 2019, the gross margin had increased by 210 basis points.
Additionally, the adjusted operating margin reached 19.4%, or $282.1 million. The earnings per diluted share were $1.62, derived from the net income totaling $211.3 million in Q3 2021. In Q3 2020, the earnings per diluted share equaled $1.16.
Valuation Metrics
LULU stock looks undervalued here as it trades below its three-year valuation multiple averages on a forward EV/EBITDA ratio and forward price-to-normalized-earnings basis. Its forward EV/EBITDA ratio is 24 times compared to its historical average of 30.3 times, and its forward price-to-normalized-earnings ratio is 38.2 times compared to its historical average of 49.8 times.
Moving forward, analysts expect EBITDA to increase by 17.7% and normalized earnings per share to increase by 18.2% over the next twelve months.
Wall Street’s Take
According to Wall Street analysts, LULU earns a Moderate Buy consensus rating based on 14 Buy, seven Hold, and zero Sell ratings in the past three months. Additionally, the average Lululemon Athletica price target of $439.2 puts the upside potential at 39.3%.
Summary and Conclusions
LULU stock looks attractively priced on numerous metrics. First of all, it trades at a discount to its historical valuation multiple averages, Wall Street analysts are generally bullish on it, and the average price target implies substantial upside potential over the next twelve months.
That said, LULU operates in a sector that is highly competitive and also faces supply chain and inflationary challenges. Overall, however, it looks like it might be a good time for investors to consider adding shares.
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