Lululemon Athletica (NASDAQ:LULU) has successfully cultivated a remarkably strong brand in recent years. With meticulous dedication, this sports apparel company has honed its focus on clothing tailored for a vibrant, active lifestyle encompassing activities like yoga, running, training, and other invigorating recreations.
Pick the best stocks and maximize your portfolio:
- Discover top-rated stocks from highly ranked analysts with Analyst Top Stocks!
- Easily identify outperforming stocks and invest smarter with Top Smart Score Stocks
The remarkable aspect is that Lululemon’s brand, rooted in these niche pursuits, has resonated on a global scale, propelling its financial performance to exceptional heights. In fact, the company’s revenue and profits continue to surge unabated, a testament to its enduring appeal.
One of the key factors contributing to this success is Lululemon’s ability to leverage its premium offerings, attracting consumers who willingly embrace the higher price tags attached to its apparel. Even behemoths in the industry, like Nike (NYSE:NKE) and Adidas (DE:ADS), can only gaze in envy at the profit margins that Lululemon commands.
This potent combination of robust growth and unrivaled profitability solidifies my conviction that the premium valuation of Lululemon’s stock is unquestionably justified. Consequently, I hold a bullish outlook on the stock.
How Does Lululemon’s Brand Value Translate to Growing Financials?
Lululemon has managed to grow its key financial metrics both at a fantastic pace and quite consistently over an extended period, and the company’s growing brand value has definitely been a key catalyst to this success. To provide some context, Lululemon’s revenues and net income have grown at a 10-year compound annual growth rate (CAGR) of 19.5% and 12.2%, respectively.
This is fantastic growth to sustain over such a prolonged period of time, especially considering that Lululemon has gradually matured as a company, being in business since 1998.
Yet, Lululemon has consistently communicated a strong brand message that gradually resonates with a large target audience. Essentially, Lululemon has positioned itself as a lifestyle brand focused on empowering individuals through fitness and mindful living. By aligning this messaging with the values and aspirations of their customers, Lululemon has built a brand that customers connect with on an emotional level.
LULU’s retail stores are designed to be welcoming, and they often host community events and fitness classes. Lululemon also invests in personalized customer service, building relationships with customers, and creating a sense of loyalty. Now add Lululemon’s strong emphasis on product quality and the use of high-performance fabrics, and you can easily see how Lululemon has instilled trust and confidence in customers that allows them to sell leggings that can cost well into the triple digits of dollars.
Due to this premium pricing, Lululemon’s margins are industry-leading and notably higher than the margins the big fish in the space, such as Nike and Adidas, are able to realize. This theme has held consistently true. Over the past 12 months, Lululemon’s gross profit margin has hovered at 56.2%, while Adidas’ and Nike’s have hovered at 46.3% and 43.9%, respectively.
It’s crazy when you think about it, given that both Nike and Adidas have considerably more comprehensive manufacturing capabilities and prospects from scaling economies due to their sheer size. Regardless, it’s due to such high margins and its lean operating model that Lululemon has been able to remain highly profitable.
What About LULU’s Valuation?
Shares of Lululemon have rallied by about 34% over the past year, clearly outperforming the overall market. This raises the question of whether LULU stock has run ahead of itself and is now overvalued. In my view, while LULU stock has indeed undergone a significant rally, its valuation appears quite reasonable.
Based on consensus estimates, the company is expected to post earnings-per-share of $11.92 in Fiscal 2023. This implies a forward P/E of 31.8, which at first glance, appears rich. That said, Wall Street also expects the company’s earnings per share to grow in the mid to high teens through 2028, which even prices in a notable deceleration from Lululemon’s historical growth rate.
Given that Nike is trading at a forward P/E of about 29 and Lululemon arguably deserves a premium due to its stronger growth prospects and heftier margins, its valuation doesn’t seem all that inflated. Overall, I believe that Lululemon’s brand value, growth prospects, and above-average margin of safety formed by its rich margins fully justify its current valuation.
Is LULU Stock a Buy, According to Analysts?
Turning to Wall Street, Lululemon has a Moderate Buy consensus rating based on 17 Buys, two Holds, and three Sells assigned in the past three months. At $416.83, the average Lululemon stock price target implies 9.9% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell LULU stock, the most profitable analyst covering the stock (on a one-year timeframe) is Sharon Zackfia from William Blair, with an average return of 48.39% per rating and a 90% success rate.
Final Thoughts
In conclusion, Lululemon Athletica’s remarkable brand value has played a significant role in driving its financial success. The company’s ability to leverage its premium offerings and connect with customers on a deeper level has propelled its revenue and profits higher over time at a rapid pace.
Furthermore, Lululemon’s industry-leading profit margins have solidified its position as a highly profitable player in the market, topping even the big industry giants. While there may be concerns about the stock being overvalued, considering Lululemon’s strong growth prospects and superior margins, its current valuation appears reasonable to me.
Thus, investors are likely to experience more upside as Lululemon meets or, as has historically been the case, beats Wall Street’s estimates. Therefore, I remain bullish on the stock.
