Lululemon Athletica Inc. (LULU) experienced a significant stock surge of 16% on December 9th, 2024, following the release of its impressive fiscal third-quarter results and an upward revision of its full-year outlook. This positive momentum followed a challenging year for the company, with its stock price declining by 20% from its starting value of $500 to around $400. This downturn, while substantial, was less pronounced than that of its competitor Nike, which saw a 27% decrease over the same period. Lululemon’s struggles in 2024 stemmed from a combination of internal missteps, including a poorly received product launch and difficulties meeting consumer demand for specific product variations, and external pressures such as increased competition and shifting consumer spending habits. The departure of the Chief Product Officer further added to the company’s challenges.
Despite these headwinds, Lululemon’s Q3 performance showcased its resilience. The company exceeded analysts’ expectations on both earnings and revenue. Earnings per share reached $2.87, a significant increase from the previous year’s $1.96 and surpassing predictions by $0.18. Revenue grew by 9% to $2.4 billion, slightly exceeding forecasts. A key driver of this success was the company’s improved gross margin, which expanded by 150 basis points to 58.5%, surpassing the anticipated 57.5%. Comparable sales also outperformed expectations, growing by 4% compared to the projected 3.2%. This positive momentum resulted in a 9.2% after-hours stock surge on December 5th, contrasting sharply with the S&P 500’s 0.2% decline.
Looking forward, revenue projections for Lululemon stand at $10.4 billion for fiscal year 2024, representing a 9% year-over-year increase. Earnings per share are forecast to reach $14.12. Based on these revised figures and a price-to-earnings (P/E) multiple of 22.7x, a valuation of $321 per share is estimated, slightly below the current market price. This valuation suggests a potential undervaluation, particularly when considering the company’s historical performance and its growth potential in untapped markets. Lululemon’s stock performance over the past three years has been volatile, with returns of 12% in 2021, -18% in 2022, and a substantial 60% in 2023, demonstrating greater fluctuations than the S&P 500.
A deeper dive into Lululemon’s Q3 performance reveals strong international growth, particularly in China, where sales surged by 33% year-over-year. This contrasts with a more modest 2% growth in the Americas, its largest market. While comparable sales in the international segment saw a robust 25% increase, the Americas experienced a 2% decline. Despite this regional variance, Lululemon’s operating margin significantly improved, expanding by 520 basis points to 20.5%, further bolstering its financial health. This strength in operating margin highlights the company’s efficiency and profitability.
Looking ahead to the crucial holiday shopping season, Lululemon projects revenue between $3.48 billion and $3.51 billion, representing growth of 8% to 10%. Earnings per share are expected to range from $5.56 to $5.64. For the full fiscal year 2024, the company anticipates revenue between $10.45 billion and $10.49 billion and earnings per share between $14.08 and $14.16, reflecting an upward revision from its previous guidance. These figures suggest continued growth and profitability, even in a competitive market landscape. Lululemon’s strategic focus on international expansion, particularly in the rapidly growing Chinese market, is a key driver of its future growth prospects.
Lululemon’s P/E ratio has fluctuated over recent years, peaking at 47x at the end of FY 2022 before declining to around 40x at the end of FY 2023. Currently at 27x, the P/E ratio remains significantly lower than the previous year’s levels, suggesting a potential undervaluation in the market. Despite the recent challenges and stock volatility, several factors point to Lululemon’s long-term growth potential. Its operating margins of approximately 20% outperform competitors like Nike and On Holding, showcasing its strong financial foundation. The men’s category, while currently a smaller part of the business, presents a significant opportunity for future growth. Furthermore, the international market, currently representing 21% of the business, offers a substantial runway for expansion. These factors, combined with the company’s strong brand recognition and loyal customer base, position Lululemon for continued success in the athletic and casual apparel market.
In conclusion, while Lululemon experienced challenges in 2024, its strong Q3 performance, positive future outlook, and strategic focus on key growth areas suggest a positive trajectory. The company’s ability to outperform expectations despite a challenging environment, coupled with its strong financials and growth potential in both men’s and international markets, positions it favorably for long-term success. Despite a volatile stock performance in recent years, the current valuation may present an attractive entry point for investors, particularly given the company’s strong fundamentals and growth potential. The competitive landscape remains dynamic, but Lululemon’s focus on innovation, strong brand equity, and operational efficiency positions it well to navigate the evolving market dynamics and capitalize on emerging opportunities.
