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Robert Approach
Funding Thesis
Last time I analysed Lululemon Athletica (NASDAQ:LULU), I talked about how the corporate has been managing its stock ranges with minimal impression to its revenue margins.
The corporate had yet one more beat-and elevate quarter, due to the exceptional efficiency seen in its worldwide markets generally, and China particularly. On this article, I spotlight how the corporate’s worldwide progress and the launch of Lululemon Studio are greater than prone to offset any opposed impression from a possible slowdown within the U.S.
Lulu’s First Quarter Highlights
LULU had yet another strong quarter, kickstarting the brand new monetary yr on a stable footing. Revenues got here in at $2 billion, up 24% year-over-year, comfortably beating analyst estimates by almost $76.5 million. Diluted EPS got here in at $2.28, beating estimates by $0.27.
The corporate additionally raised its steerage for FY23, with revenues now anticipated to return in between $9.44 and $9.51 billion, effectively above the consensus estimate of $9.36 billion. Diluted EPS is now anticipated to be within the vary between $11.74 and $11.94, as soon as once more beating the consensus estimate of $11.60.
The expansion in income of its equipment division, up 67% year-over-year, was notably noteworthy.
Lulu’s Group Based mostly Mannequin is Working as Evidenced from Progress in China
In the fourth quarter of FY22, LULU had posted a 30% year-over-year progress in China regardless of the Covid protocols in place. Within the newest quarter, with the Covid restrictions lastly lifted, the corporate had a blowout efficiency in China as revenues jumped 79% year-over-year.
The quantity of brand name consciousness, which the corporate has generated within the area, by leveraging its community-based model is clearly paying off. The expansion in China was the foremost issue behind the corporate’s 60% year-over-year gross sales progress in its worldwide markets.
With the corporate anticipated to open 30 to 35 shops within the worldwide markets in 2023, the vast majority of that are earmarked for China, LULU’s progress story exterior North America seems to be removed from over.
Lululemon Studio Gives a New Gateway to Entice New Shoppers
A significant takeaway from LULU’s first quarter was the launch of the corporate’s digital app, Lululemon Studio. The platform presents U.S. customers entry to the corporate’s digital content material with out having to buy the corporate’s {hardware}. The membership plan, which costs $12.99 per month, is a further providing and is separate from the corporate’s free-to-join Necessities membership program.
Lululemon Studio ought to supply the corporate with a further income and is prone to entice a complete new class of customers. The corporate has already had success with Necessities, which noticed its membership rely attain 8 million inside six months of its launch.
According to Vantage Market Research, the health app market is forecast to develop, at a CAGR of 17.30%, to $21 billion by 2030. Whereas the Studio might not be the main participant on this class, it’s nonetheless anticipated to be a robust progress driver for LULU, in my view, given this class’s Complete Addressable Market (TAM). Furthermore, LULU is extra prone to leverage the information generated from Studio to drive innovation in its {hardware} division.
The corporate’s digital gross sales within the first quarter accounted for 42% of the overall income and the digital section noticed site visitors leap roughly 30% year-over-year. With Lululemon studio, the corporate has the power to drive the expansion of its digital division much more.
Valuation
Ahead P/E Method |
|
Worth Goal |
$438.00 |
Projected Ahead P/E A number of |
37x |
Projected FY23 EPS |
$11.84 |
Supply: Company’s Q1 Earnings Release, Refinitiv, and Writer’s Calculations
The corporate is presently buying and selling at a ahead P/E of 28x, in line with Refinitiv, which in my view, shouldn’t be costly given the truth that traditionally the corporate has traded at 37x. With LULU anticipated to see its diluted EPS develop almost 77% in FY23, I’ve assumed a ahead P/E of 37x since, in my view, the earnings progress justifies the premium a number of.
A ahead P/E of 37x and an FY23 EPS of $11.84, which is the midpoint of the corporate’s up to date steerage, leads to a worth goal of $438, which represents a 23% enhance from present ranges.
Threat Elements
The largest threat issue continues to be the macroeconomic uncertainties, which proceed to plague the retail sector.
Moreover, one of many main catalysts in my thesis is the longer term efficiency of Lululemon Studio. There’s the chance that the digital app fails to take off. Recall that the corporate has, previously, tried to launch a Peloton-like providing, by its acquisition of Mirror. The acquisition today is almost worthless, so LULU does have a poor historical past with digital choices. As such, the longer term efficiency of Lululemon Studio must be monitored intently.
Concluding Ideas
I proceed to love LULU. The China progress story is taking part in out remarkably, particularly now that Covid restrictions are eliminated and because of the corporate’s community-based mannequin. The launch of Lululemon Studio presents a possibility to draw new clients and supplies the corporate with one other income channel. From a valuation perspective, LULU continues to stay attractively priced regardless of the leap seen put up the earnings launch.
Total, it has been a powerful begin to the yr for LULU and based mostly on the takeaways from the corporate’s Q1 efficiency, the expansion nonetheless has legs to run.
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