Investors Who Wrote Off Lululemon Were Wrong as Shares Jump on Strong Revenue Growth. Is It Too Late to Buy the Stock?

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Shares of Lululemon Athletica (NASDAQ: LULU) jumped following strong fiscal first-quarter results, but the stock has still had a difficult year, down over 30% year to date. Let’s dive into the company’s Q1 results, look at why the stock has struggled, and assess whether now is a good time to buy the stock.

Sales and margins remain strong

For its fiscal first quarter, Lululemon saw its revenue rise 10%, or 11% on constant currencies, to $2.2 billion. Women’s sales rose 10%, while men’s sales were up 15% and accessory sales edged up 2%.

Revenue in the Americas increased 3%, or 4% in constant currencies, while International sales jumped 35%, or 40% in constant currencies. U.S revenue edged up 2%, while Mainland China sales soared 45%, or 52% in constant currencies.

Same-store sales rose 7% in the quarter. International same-store sales surged 29%, while Americas same-store sales were flat. China saw a 33% increase in same-store sales. Lululemon said that it missed several opportunities on the women’s side of the business in the U.S. This included issues with bags, and having too narrow a color assortment, especially for leggings.

The company ended the quarter with 711 stores, unchanged from the quarter’s start. It had 662 stores at the end of Q1 last year.

The athleisure brand saw its gross margins rise 20 basis points to 57.7%, while product margins were up 120 basis points. Gross margins for apparel brands are particularly important, as they reflect what percentage of merchandise is being sold at full price versus being marked down. Steep declines in gross margins can lead to both earnings erosion and inventory issues, so it is an important metric to monitor.

Inventory levels, meanwhile, were down year over year from $1.58 billion a year ago to $1.35 billion. Given its increased number of stores, this shows the company is doing a good job of keeping inventory lean.

Looking ahead, Lululemon forecast fiscal second-quarter revenue to come in at between $2.40 billion to $2.42 billion, representing growth of 9% to 10%, and for adjusted earnings per share (EPS) to fall within a range of $2.92 to $2.97. For its full year, it is looking for revenue to be between $10.7 billion to $10.8 billion, equating to growth of 11% to 12%, and adjusted EPS in the range of $14.27 to $14.47.

The revenue forecast was unchanged from its prior outlook, while adjusted EPS was up from a previously forecast range of $14.00 to $14.20. The company is looking to open between 35 to 40 new stores this year, with 10 in the U.S. and the rest mostly focused on China.

Lululemon aims to power growth in the second half of the year through the introduction of innovative new products in both its women’s and men’s assortments. This includes introducing a new performance fabric in leggings, and a more versatile swimsuit line. In men’s, it has a new Show Zero technology that will hide the appearance of sweat on the outside of the shirt, which it is applying to polos.

Image source: Getty Images.

Time to buy the stock?

Lululemon’s stock has struggled this year as investors have feared that the company is losing some of its brand power. When the company reported its fiscal fourth-quarter results in March, it noted a change in consumer behavior in the U.S. Its chief product officer’s leaving in May to pursue other opportunities also did not help.

Meanwhile, some Wall Street analysts have turned bearish on the stock, with Jefferies analyst Randy Konik saying in May that the stock would crash next year. The analyst said that the overall athleisure category is slowing, that the fashion is shifting to wide legs, and that competition is increasing from the likes of Alo and Vuori within the space.

Those are all risks to the stock, but if Lululemon has shown anything over the past decade, it is that it is a premium brand that resonates with customers. While its U.S. business did slow this quarter after strong prior year gains, there is no reason to think that athleisure is played out and that the company can’t adjust to some minor fashion changes.

Meanwhile, the company is still in the early days of international expansion and doing a great job breaking into China. It has also proven in the past that it has enough brand power to not be affected by cheaper-priced competition.

LULU PE Ratio (Forward) Chart

Right now, Lululemon shares are trading at around a 23 forward price-to-earnings (P/E) ratio, which is well below the 30 times or more P/E at which it has historically been valued. At those levels, I’d be a buyer given the power of the brand. If and when your teenage daughter, granddaughter, or niece no longer finds the brand appealing, though, it may be time to rethink buying the stock.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica. The Motley Fool has a disclosure policy.

Investors Who Wrote Off Lululemon Were Wrong as Shares Jump on Strong Revenue Growth. Is It Too Late to Buy the Stock? was originally published by The Motley Fool