Global Expansion And Digital Innovation Set To Drive Exceptional Growth And Shareholder Value

Key Takeaways

• Aggressive international expansion and product innovation, particularly in women's wear, are key strategies to enhance overall revenue and margins.
  
• Strategic investments in digital platforms and stock repurchase programs reflect confidence in financial health and a focus on shareholder value.
  
• Challenges in product innovation, U.S. market performance, international expansion risks, inventory management, and distribution efforts could significantly impact future profitability and growth.

Catalysts

Designs, distributes, and retails athletic apparel, footwear, and accessories under the lululemon brand for women and men.

• Expanding international business is highlighted as a key growth opportunity, with Lululemon on track to quadruple international revenue from 2021 levels by the end of 2026, suggesting significant potential to boost overall revenue through global market penetration.
  
• The company's emphasis on innovation and seasonal newness aims to address product gaps and refresh offerings, particularly in women's wear, which could positively impact conversion rates and sales, potentially enhancing revenue and margins.
  
• Stock repurchase programs, including the repurchase of $584 million of stock in quarter 2, demonstrate confidence in the company's financial health and a strategy to improve earnings per share (EPS), ultimately rewarding shareholders.
  
• Strong gross margin performance and operating margin increase indicate operational efficiency and cost management, suggesting a healthy financial structure capable of sustaining growth and potentially increasing net margins.
  
• Strategic investments in digital and e-commerce platforms, along with a targeted approach to building brand awareness through partnerships and activations, are expected to drive customer engagement and loyalty, which could lead to sustained long-term revenue growth.

Assumptions

• Analysts are assuming Lululemon Athletica's revenue will grow by 9.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 16.3% today to 16.0% in 3 years time.
• Analysts expect earnings to reach $2.1 billion (and earnings per share of $17.95) by about November 2027, up from $1.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $1.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.9x on those 2027 earnings, down from 22.7x today. This future PE is greater than the current PE for the US Luxury industry at 18.2x.
• Analysts expect the number of shares outstanding to decline by 2.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.18%, as per the Simply Wall St company report.

Risks

• The reliance on introducing newness in women's products as a significant factor for maintaining customer interest could lead to fluctuations in the company's revenue if new product introductions do not meet customer expectations or if execution lags.
  
• Challenges in the U.S. market, particularly with flat revenue and missed opportunities in women's categories, could impact future earnings if not addressed with successful product plans and market strategies, affecting net margins.
  
• International expansion, particularly in China, carries geopolitical and macroeconomic risks that could affect future sales and earnings growth in those regions.
  
• Inventory management and product margin pressures mentioned, especially regarding managing the balance of new and core products, could lead to increased markdowns or stockouts, negatively impacting gross margin and overall profitability.
  
• The complexity and uncertainty of managing a multi-year distribution center project and investments in new store openings, particularly in the international markets primarily China Mainland, could impact operating expenses and margin if not executed efficiently or if external factors delay progress.

Valuation

• The analysts have a consensus price target of $319.62 for Lululemon Athletica based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $445.0, and the most bearish reporting a price target of just $194.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $13.0 billion, earnings will come to $2.1 billion, and it would be trading on a PE ratio of 21.9x, assuming you use a discount rate of 7.2%.
• Given the current share price of $301.85, the analyst's price target of $319.62 is 5.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.