Headquartered in Vancouver, Canada, Lululemon Athletica Inc. (LULU) designs, distributes, and retails athletic apparel, footwear, and accessories under the Lululemon brand, catering to women and men.  As LULU prepares to lift the curtains on its fiscal third-quarter results on December 7, 2023, this article aims to shed light on the fundamental aspects of LULU. Let’s understand in detail.

LULU has strategically engaged in impactful collaborations to amplify its market footprint and reach. A prime example occurred on September 27, when LULU and Peloton unveiled a comprehensive five-year global partnership.

In this venture, Peloton assumes the exclusive role of providing digital fitness content for LULU, while LULU becomes Peloton's primary athletic apparel partner. This collaborative effort is anticipated to elevate brand awareness and extend the market presence of both companies.

Apart from impactful collaborations, the athletic retailer witnessed robust top-line and bottom-line growth in the second quarter, primarily driven by impressive international expansion.

Sales in North America surged by a notable 11%. However, the global business fell slightly short of expectations, with same-store sales increasing by 11% in the quarter, just below the estimated 12.1% reported by StreetAccount.

Furthermore, LULU has been on a winning streak lately in terms of price performance with a year-to-date gain of 43.8%. However, the company saw a dip in its share price yesterday as Wells Fargo downgraded LULU to equal weight from overweight, as the company’s valuation is no longer considered cheap. LULU’s shares lost marginally intraday to close the last trading session at $460.76.

Meanwhile, LULU’s institutional holdings have seen recent shifts. Among the 1,180 institutional holders, 533 have augmented their positions, while 433 have reduced their positions, and 91 have completely divested from their holdings. This indicates a changing sentiment among institutional investors regarding their stake in LULU.

Here are the financial aspects that could affect LULU’s performance in the near term:

Mixed Financials

For the fiscal second quarter that ended on July 30, 2023, LULU’s net revenue increased 18.2% year-over-year to $2.21 billion, while its net income and EPS amounted to $341.60 million and $2.68, up 17.9% and 18.6% from the prior-year quarter, respectively.

However, during the same period, the company’s cash and cash equivalents came in at $1.11 billion, declining 4.1% compared to $1.15 billion as of January 29, 2023.

Robust Profitability

The stock’s trailing-12-month net income margin of 11.40% is 155.9% higher than the 4.45% industry average. Its trailing-12-month Return On Common Equity (ROCE) of 31.52% is 182.1% higher than the industry average of 11.17%. Furthermore, LULU’s trailing-12-month cash per share of $8.74 is 278.8% higher than the $2.31 industry average.

High Valuation

In terms of forward non-GAAP P/E, LULU is trading at 38.31x, 154.3% higher than the industry average of 15.07x. Its forward EV/EBITDA multiple of 23.32 is 138.1% higher than the industry average of 9.79.

Likewise, the stock’s forward Price/Book ratio of 14.43x is 472.5% higher than the industry average of 2.52x. Furthermore, its forward EV/Sales multiple of 6.17 is 416.9% higher than the industry average of 1.19.

POWR Ratings Reflect Uncertainty

LULU’s fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C, translating to a Neutral in our proprietary rating system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. LULU has an A grade for Quality, consistent with its higher-than-industry profitability.

On the other hand, the stock has a C grade for Growth, in sync with its mixed growth in the last reported quarter.

Within the Fashion & Luxury industry, LULU is ranked #39 out of the 63 stocks.

Beyond what we’ve stated above, we have also rated the stock for Value, Momentum, Stability, and Sentiment. Get all ratings of LULU here.

Bottom Line

Despite such strong profitability and strategic collaborations, the company’s mixed financial growth in its last reported quarter fails to justify such a high valuation. Furthermore, given the elevated valuation, LULU’s downgrade by Wells Fargo casts a shadow of uncertainty on its prospects. Thus, it could be wise for investors to monitor this stock for a better entry point.

How Does Lululemon Athletica Inc. (LULU) Stack Up Against Its Peers?

While LULU has an overall grade of C, equating to a Neutral rating, you may also check out these other stocks within the Fashion & Luxury industry: Weyco Group, Inc. (WEYS), J.Jill, Inc. (JILL), and H & M Hennes & Mauritz AB (HNNMY), with an A (Strong Buy) and B (Buy) ratings. For exploring more Fashion & Luxury stocks, click here.

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LULU shares were trading at $458.82 per share on Tuesday afternoon, down $1.94 (-0.42%). Year-to-date, LULU has gained 43.21%, versus a 20.49% rise in the benchmark S&P 500 index during the same period.

Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.

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