Lululemon Athletica, Inc. – Still an ultra-high-quality fashion business
Lululemon regained investor confidence and showed its ultra-high-quality nature last week. Yet, after a 60% share price recovery in three months, is now still the time to buy?
You didn’t act on my buy call back in September? Well, you might have missed the boat on that one, with shares up 60% since September 1st.
Nevertheless, we can safely say Lululemon shares (ticker: $LULU) haven’t been particularly loved by investors in 2024. Amid economic headwinds and some operational flaws in recent quarters, shares declined a whopping 50%+ this year before taking back some of those losses in recent months as shares became ridiculously cheap (hence, my September buy call).
Even today, these remain down 22% YTD, even after last week’s uptick post earnings.
You see, Lululemon reported third-quarter results last Thursday, and it impressed against a tough macro backdrop of continued consumer spending weakness, particularly in the U.S. It delivered solid results and reminded investors that its brand remains highly regarded among consumers and that its runway of growth is significant.
The company surpassed the consensus estimates and raised its FY24 guidance well above both consensus estimates and my own, driven by improving fundamentals. In response, shares gained about 16% in the following trading session last Friday, which is much deserved!
Despite all that has happened this year, including management changes, a growth slowdown, operational struggles, and straight-up operational mistakes, I still view Lululemon as a high-conviction long-term investment idea. It maintains a key position in most of the portfolios I manage, and its products are very much present in my closet.
Ultimately, as I explained last time out, “Lululemon has an incredibly strong brand (In the top 100 most valuable brands globally, according to Kantar), a differentiated business model through a focus on high-end apparel and innovation, and an insanely long runway of growth ahead thanks to very low unaided brand awareness and expansion opportunities outside of North America and into other product categories like Men’s apparel.
Besides this, it has a capable management team and healthy financials and continues to grow strongly while delivering industry-leading margins, quarter after quarter. As it is taking market share from Nike and other peers and is a leading innovator in fabrics (which I absolutely love), it has a clear runway for many more years of double-digit growth, making it one of my top picks and favorite brands, even amid current headwinds.”
Let me tell you: This isn’t your everyday clothing brand. It is a very differentiated player focused on quality and innovation, which allows it to price its products at a premium and take market share from competitors.
Indeed, I remain very bullish on the company’s long-term prospects. But… is now the right time to start picking up shares after the recovery in recent months?
Let’s make up the balance by reviewing last quarter’s developments, numbers, and management’s updated guidance. Subsequently, I will update my financial projections, target price, and rating.
Let’s delve into the numbers!
Improving fundamentals and an uptick in demand led to a Q3 outperformance
Lululemon reported its third-quarter results last Thursday and managed to impress with both its top and bottom-line numbers exceeding the Wall Street consensus and its own expectations, as the company saw somewhat surprisingly strong demand in international markets, while the operating environment in the U.S. has stabilized.
You see, in recent quarters, LULU's growth has slowed rather dramatically, from high twenties growth in 2022 to single digits in recent quarters. This has led to fear among investors that the growth thesis might be broken and that the brand might not be as strong as previously thought.