Lululemon Stock: What’s behind Its Exceptional Growth?

  • Lululemon stock is beating the broader markets by a wide margin.
  • Barclays has initiated coverage on LULU with an “overweight” rating.

Lululemon stock outpaces broader markets

Shares of Lululemon Athletica (LULU) have marked exceptional growth so far this year and have outperformed the broader markets by a considerable margin. Stellar demand for athletic apparel, a digital transformation, and premium pricing continue to drive its revenue and earnings and, in turn, its stock.

Lululemon stock is up 82.7% YTD (year-to-date) as of November 26. In comparison, Nike (NKE), Skechers (SKX), and Columbia Sportswear (COLM) are up 25.3%, 77.3%, and 8.2%, respectively, YTD. Meanwhile, Under Armour (UAA) stock is down about 2% so far this year, as an accounting probe has taken a toll on it.

Lululemon stock is trading near its 52-week high of $226.66. Meanwhile, it’s trading about 101% above its 52-week low of $110.71. The stock outperformed its peers in terms of growth in 2018 as well.

LULU stock jumped nearly 55% in 2018. In comparison, Nike rose 18.5%. Moreover, Under Armour and Columbia Sportswear stocks rose 22.5% and 17.0%, respectively, in 2018.

What’s driving Lululemon stock?

The outstanding growth in Lululemon stock is the result of the company’s stellar financial performance over the last several quarters. For instance, the company’s top line has topped analysts’ estimates in the past several quarters. Moreover, its revenue has increased at a double-digit rate for the past nine quarters. Notably, Lululemon’s revenue jumped nearly 24% in 2018. Furthermore, it’s marked more than 20% growth in the last six straight quarters.

During its last-reported quarter, Lululemon’s revenue soared 22%. Meanwhile, its comparable sales rose 15%. Premium pricing, digital expansion, innovation, and higher sales in its direct-to-consumer business are supporting its sales growth.

Meanwhile, pricing and growth in its high-margin direct-to-consumer business supported its margins and, in turn, its earnings. Robust sales growth and margin expansion drove more than 30% growth in its bottom line in the last seven consecutive quarters.

Further, Lululemon has increased its sales and earnings guidance twice this year, which also supported the uptrend in the stock.

What’s in the offing?

On November 25, Barclays initiated coverage on Lululemon stock with an “overweight” rating and a $257 price target. This price target represents an upside of about 16% based on its closing price of $222.16 on November 25. Meanwhile, the majority of analysts also maintain favorable outlooks on Lululemon stock.

A total of 20 out of 32 analysts suggest “buys” on LULU. Twelve analysts maintain “hold” ratings. However, analysts have a price target of $217 on LULU stock, which is nearly 2% below its closing price on November 25.

We believe innovation and continued demand for athletic apparel and footwear will continue to drive Lululemon’s top and bottom lines. Analysts’ consensus estimates indicate that Lululemon’s revenue and earnings will continue to grow at a double-digit rate in the coming quarters, including in fiscal 2020.

However, Lululemon’s high valuation and tough year-over-year comparisons call for a pullback. We believe a pullback in the stock could present an opportunity to go long on it. Moreover, the surge in the stock reflects the positives.

Lululemon stock is trading at a forward PE multiple of 40.4x, which is significantly higher than the peer average. Meanwhile, LULU is trading at 25.2x its next-12-month enterprise value-to-EBITDA multiple, which is also higher than the peer average of 7.2x.