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Key Morningstar Metrics for Lululemon Athletica
What We Thought of Lululemon Athletica’s Earnings
Lululemon Athletica LULU shook off the troubles of 2024’s first half, posting third-quarter sales and earnings that surpassed our expectations. Although comparable sales fell 2% in the Americas (against 13% growth a year ago), there are reasons to be optimistic about upcoming product launches in 2025, and the firm’s international sales have soared. We expect to lift our fair value estimate of $269 per share by a mid-single-digit percentage, but we rate the stock as overvalued since it’s rallied more than 40% over the past three months.
Considering quarterly sales growth rates by region, 2% overall growth in the Americas (74% of total) aligned with our estimate, but growth rates of 39% in Mainland China (13%) and 27% in other international (13%) were each 6 percentage points above our forecast. Lululemon recently restructured its product development team, and we expect new products in both established and newer categories will lift sales growth rates in the Americas to the mid-single digits in 2025 and beyond. Meanwhile, we model 10-year compound average annual sales growth rates of 23% in Mainland China and 19% in other international thanks to store openings, greater consumer awareness, the global growth of athleisure, and category extensions.
Lululemon’s gross margin of 58.5% beat our estimate by 60 basis points, and its operating margin of 20.5% beat our forecast by 70 points. Despite concerns that slow North America sales would necessitate discounting, the company reported higher initial prices and flat markdowns. In the long run, we think Lululemon can hold gross margins in the high 50s and post operating margins of around 22%.
Lululemon’s outlook for fourth-quarter EPS of $5.56-$5.64 appears overly conservative. We appreciate that the company wants to be cautious, given the unusually short Christmas shopping season, but its stabilizing North America sales and international growth suggest it could outperform guidance.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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