Lululemon Earnings: Near-Term Outlook Dims, but Profitability and Underlying Brand Strength Hold

Key Morningstar Metrics for Lululemon Athletica

• Fair Value Estimate: $296.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

What We Thought of Lululemon Athletica’s Earnings

Since the beginning of 2024, Lululemon’s LULU shares have plummeted nearly 50%, due primarily to concerns that its business in the Americas (73% of second-quarter sales) is adversely affected by rising competition and changes in consumer taste. Although the firm’s revenue growth in the region has slowed, it met our 1% estimate in the second quarter, and its overall profitability held up well. Indeed, shares rose 4% during after-hours trading on Aug. 29, likely because pessimism among some investors and analysts going into the report was unusually high. Despite some challenges, we still think Lululemon’s brand power (the source of our narrow moat rating based on an intangible asset) remains intact. We do not expect to make any material change to our fair value estimate of $296 per share, leaving the stock slightly undervalued.

Lululemon’s 7.3% sales growth in the quarter was short of our 9.5% estimate, as international growth was a bit shy of our forecast, but still very high (34% in mainland China, 24% elsewhere). Despite the sales slowdown, the company’s 59.6% quarterly gross margin was nearly 2 percentage points above our estimate. The gross margin benefited from lower costs and strong pricing. We are encouraged that the firm did not resort to damaging markdowns when sales were light. Bolstered by the gross margin performance, its operating margin was 22.8%, an increase of 110 basis points and nicely above our 21.1% estimate. We think Lululemon can hold operating margins in the low 20s in the long run.

Lululemon lowered its 2024 guidance for earnings per share to $13.95-$14.15 (from $14.27-$14.47) on 8%-9% sales growth (from 11%-12%). Like many peers, the company faces an uncertain holiday period, given underwhelming consumer spending on apparel and a shorter Christmas selling season. We expect to lower our forecast to reflect this new outlook, but the impact on our valuation will likely be small. Moreover, Lululemon has a history of beating earnings guidance.