Is lululemon a Good Momentum Stock to Buy?

Canada-based athletic apparel company Lululemon Athletica Inc. (LULU) designs, distributes, and sells athletic apparel and accessories for women and men through company-operated stores and direct-to-consumer channels. Shares of LULU have jumped 9.5% in price over the past five days and 25.7% over the past three months.

The apparel retailer’s stellar price performance can be attributed to its solid second-quarter earnings, which beat consensus estimates. In addition, the company witnessed sustained strength in e-commerce during the quarter and raised its full-year outlook for revenue and profits.

The stock is currently trading 3.2% below its $434.22 all-time high, which it hit on September 9. Although the company’s continued momentum across all its business segments and improved product offerings boosted its revenue in its last reported quarter, the stock’s significantly higher valuation than many of its peers in the retail sector is a concern. Furthermore, supply chain headwinds and pandemic-related challenges could lead to bearish investor sentiment.

Here is what we think could influence LULU’s performance in the coming months:

Strategic Collaboration to Bring Sustainable Alternatives

Last month, LULU entered a multi-year partnership with Genomatica, a leading sustainable materials innovator, to introduce renewably sourced, bio-nylon materials into LULU’s products. This marks the company's first-ever investment in a sustainable materials company to replace conventional nylon with plant-based nylon. In addition, the collaboration demonstrates LULU’s commitment to produce 100% of its products with sustainable materials and end-of-use solutions by 2030 and to meet the growing demand for more environmentally friendly products.

Business Headwinds

While the athleisure retailer reported robust sales growth in its last reported quarter, the company’s CFO Meghan Frank stated that LULU continues to navigate the COVID-19 environment, including “supply chain headwinds.” For example,  the latest COVID-19-related factory shutdowns in Vietnam have made matters worse for the U.S. apparel industry, which is heavily dependent on these manufacturing units.

According to a Wall Street Journal report, LULU relies on the country for approximately one-third of its manufacturing. As the holiday season approaches, this supply chain headwind could lead to delayed orders and a shortage in inventory for the retailer, thereby negatively affecting its sales in the near term.

Impressive Financials

LULU’s net revenue increased 61% year-over-year to $1.45 billion in the second quarter, ended June 30, 2021. This can be attributed primarily to the 142% increase in company-operated stores net revenue. Furthermore, the company’s direct-to-consumer net revenue surged 8% from the prior-year quarter to $597.4 million. Its gross profit amounted to $842.7 million, representing a 72% increase year-over-year. Also, its net income grew 139.7% from its  year-ago value to $208.07 million over this period. LULU’s EPS came in at $1.59, up 140.9% year-over-year.

The company’s 57.6% trailing-12-month gross profit margin is 60.5% higher than the 35.9% industry average. Also, LULU’s 15% net income margin is 139.7% higher than the 6.2% industry average. In addition, its ROE and ROA of 35.4% and 18.8%, respectively, are 100.3% and 202.1% higher than the industry averages.

Sky-High Valuation

In terms of forward non-GAAP P/E, LULU’s 56.82x is 292.6% higher than the 14.47x industry average. Likewise, its 8.85 forward Price/Sales ratio is 633.4% higher than the 1.21 industry average. The stock’s 8.80x forward EV/Sales is 489.9% higher than the 1.49x industry average. LULU’s 17.77x forward Price/Book multiple is 409.9% higher than the 3.48 industry average.

POWR Ratings Reflect Uncertainty

LULU has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. LULU has a D grade for Value. The stock’s higher-than-industry P/E ratio is in sync with this grade.

Moreover, the company has a Momentum grade of A, in sync with its price returns over the past three months.

In terms of Stability Grade, LULU has a C. This reflects the stock’s relatively high 1.36 beta.

In addition to the grades we’ve highlighted, one can check out additional LULU ratings for Growth, Quality, and Sentiment here. LULU is ranked #41 of 63 stocks in the A-rated Fashion & Luxury industry.

Bottom Line

A robust direct-to-consumer sales growth, sustainable product offering, and strength across all channels have contributed to LULU’s solid financial performance and momentum lately. However, the company’s lofty valuation, and supply chain challenges that continue to plague the apparel industry, could add uncertainties to the stock’s growth prospects. So, we think investors should wait for the near-term headwinds to subside before investing in the stock.

How Does Lululemon Athletica (LULU) Stack Up Against its Peers?

While LULU has an overall POWR Rating of C, one might want to consider taking a look at its industry peers Genesco Inc. (GCO) and Movado Group Inc. (MOV), which have an A (Strong Buy) rating.

Note that GCO  is one of the few stocks handpicked by our Chief Value Strategist, David Cohne, currently in the POWR Value portfolio. Learn more here.

LULU shares rose $0.50 (+0.12%) in premarket trading Wednesday. Year-to-date, LULU has gained 20.82%, versus a 19.58% rise in the benchmark S&P 500 index during the same period.

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.

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