A Strong Brand Momentum Drives Lululemon Shares To A Buy

According to Citi, Lululemon is in good shape, with all systems in place to sustain accelerated growth in 2023 and it is "checking all the right boxes.". 

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As a result of the company topping estimates for its fiscal fourth-quarter earnings and offering a positive outlook for the year ahead, Citi raised its rating on Lululemon shares to buy from neutral. According to the company, it earned $4.40 per share in its most recent quarter, excluding items, on revenue of $2.77 billion, putting it at a profit of $4.40 per share. Based on the results of the Refinitiv survey, analysts were projected to make $4.26 per share on a revenue of $2.7 billion for the company.

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A note written by analyst Paul Lejuez on Wednesday stated, “While we liked the stock before the 4Q (3/24 note), we are even more impressed with the stock after the 4Q results and the F23 outlook.” According to Lejuez, the inventory-to-sales gap was significantly better than expected and is on track to continue to improve (with limited markdown pressure). 

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Lululemon doesn't appear to be facing a slowdown in sales in the first quarter, which is underscoring the strength and momentum of the brand in its largest market, which underscores Lululemon's brand strength/momentum.

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By fiscal 2027, Lejuez forecasts the brand will account for a staggering 22% of the brand's sales, up from 8% in fiscal 2022, as Chinese sales are expected to rapidly increase in a very significant way, as it became "a much more meaningful long-term growth driver" for the brand. 

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Lululemon shares have been upgraded by Citi from a $350 price target to $440. This implies a 37.4% upside from the closing price of Tuesday. 

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As Lejuez noted, Lululemon's U.S. sales have doubled since 2019, emphasizing its strong brand reputation as well as the continued opportunities it has in a market that is already mature. In comparison, Lululemon's management has stated that first-quarter sales will increase by a minimum of 17% and 19% from last year, and he expects its earnings per share to grow more than 20% every year until 2027.

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"Again, LULU has consistently invested in their business over this period, in our opinion, which will continue to drive continued topline growth in mid-teens for the foreseeable future," added Lejuez. "While many retailers experienced significant sales gains during the pandemic, they also experienced significant margin expansion during this period as well." 

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"LULU's earnings are 'under-earning' relative to the growth of its sales base, so if sales do slow, they have flexibility," an analyst added.

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As of Wednesday, Lululemon shares were down 6.8% over the past 12 months, despite a 15% jump in 2023.