lululemon athletica inc. LULU is likely to witness top and bottom-line growth when it reports third-quarter fiscal 2024 results on Dec. 5, after market close. The Zacks Consensus Estimate for fiscal third-quarter sales is pegged at $2.4 billion, indicating a 6.8% increase from the year-ago quarter's reported figure.
Stay up-to-date with all quarterly releases: See Zacks Earnings Calendar.
The consensus estimate for the company's fiscal third-quarter earnings is pegged at $2.69 per share, suggesting a 6.3% rise from the year-ago quarter’s actual. Earnings estimates have moved down by a penny in the past seven days.
The Vancouver-based company has been reporting steady earnings outcomes, as evident from its top and bottom-line surprise trends in the trailing four quarters. LULU has a trailing four-quarter earnings surprise of 7.9%, on average. Given its positive record, the question is, can LULU maintain the momentum?
Image Source: Zacks Investment Research
Earnings Whispers
Our proven model conclusively predicts an earnings beat for lululemon this season. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.
lululemon has an Earnings ESP of +0.45% and a Zacks Rank of 3. You can see the complete list of today's Zacks #1 Rank stocks here.
Key Insights on Trends to Define LULU’s Q3 Results
lululemon is expected to have continued its business momentum in the third quarter of fiscal 2024, showcasing growth across various channels, regions and product categories. This growth is likely to have been driven by positive consumer response to its products, increased in-store traffic and a robust online performance.
lululemon is also poised to benefit from the strong business momentum in its international markets, including Mainland China and the Rest of the World, as the brand connects well with customers globally. The company is optimistic about its potential in Mainland China, where it is expanding its stores and e-commerce platforms. It plans to continue its strategies to boost global brand awareness, which is likely to have contributed to the top-line performance in the fiscal third quarter.
On the last reported quarter’searnings call management expressed confidence in the ongoing strength of its international business, particularly in Mainland China. Our model forecasts international revenues of $548.5 million for the fiscal third quarter, accounting for 23.3% of the total revenues. We expect revenues in Mainland China to be $277.8 million.
lululemon athletica inc. Price and EPS Surprise
lululemon athletica inc. price-eps-surprise | lululemon athletica inc. Quote
The company has been on a growth trajectory with its Power of Three x2 growth plan, focusing on product innovation, guest experience and market expansion. Strategic initiatives like community-based events and brand campaigns have been crucial for increasing brand awareness, attracting customers and strengthening brand loyalty. These efforts are expected to have aided the company's fiscal third-quarter performance.
Additionally, lululemon's men's business has maintained strong momentum, driven by positive customer response to innovations across performance, lounge and the ABC franchise. With significant market share gains in the men's category, the company sees this as a key growth opportunity, contributing meaningfully to its top line in the upcoming quarter. Our model predicts revenues for the men’s category to increase 10.8% year over year in the fiscal third quarter, reflecting 23.7% of total revenues.
On the last reported quarter’searnings call management anticipated net revenues of $2.34-$2.365 billion for the fiscal third quarter, indicating 6-7% year-over-year growth.
Our model predicts company-operated stores and the direct-to-consumer channel to see year-over-year revenue growth of 8.1% and 5.3%, respectively, in the fiscal third quarter. Other sales are expected to rise 8.3% year over year.
The company expects SG&A expenses, as a percentage of sales, to decline 40-50 basis points (bps) year over year in the fiscal third quarter, led by improved sales and ongoing expense management. Our model estimates the SG&A expense rate to decline 70 bps to 37.7% for the fiscal third quarter.
However, lululemon continues to face challenges from inflation, which has reduced discretionary spending and pressured its women’s category, particularly in the Americas. Rising inflation and higher interest rates have made consumers more selective with their purchases, posing a significant hurdle for luxury brands like lululemon, especially in the United States.
A slowdown in the women’s category has been attributed to a product strategy with fewer updates to core and seasonal styles, such as limited changes in color, print, patterns and silhouettes. This lack of newness, driven by earlier product decisions, has resulted in fewer fresh options for female shoppers, affecting conversion rates.
While lululemon remains confident in its innovation pipeline and long-term recovery, near-term results are expected to reflect the lack of new products in the women’s category, as outlined in its fiscal third-quarter outlook.
The company has also faced inventory shortages in key product lines, including popular bag designs and essential apparel sizes and colors, particularly in the United States. Efforts are underway to address these gaps, with stock replenishment anticipated in the second half of fiscal 2024. These inventory issues have likely impacted margins in the fiscal third quarter.
On the last reported quarter’searnings call management projected a gross margin contraction of 50-60 basis points (bps) year over year, driven by fixed cost deleverage and ongoing investment in its multi-year distribution center project. While product margins are expected to remain flat year over year, higher freight costs are anticipated to contribute a 60-bps increase, with markdowns remaining stable.
We estimate a 50-bps year-over-year decline in the adjusted gross margin, bringing it to 57.6% for the fiscal third quarter.
LULU’s Price Performance & Valuation
lululemon’s shares have exhibited an uptrend in the past three months, rising 23.1% compared with the industry’s growth of 14.8%. Additionally, the company has outperformed the Zacks Consumer Discretionary sector and the S&P 500’s growth of 14.1% and 6.3%, respectively.
lululemon’s 3-Month Performance
Image Source: Zacks Investment Research
The lululemon stock has outperformed industry peers G-III Apparel GIII and V.F. Corp’s VFC growth of 11.9% and 11.8%, respectively, in the past three months. Also, lululemon has left behind Guess GES, which lost 20.9% in the same period.
At its current price of $319.52, the LULU stock trades at a 41.4% premium to its 52-week low of $226.01. Moreover, the stock reflects a significant discount of 38.1% from its 52-week high of $516.39.
From the valuation standpoint, the company trades at a forward 12-month P/E multiple of 21.42X, exceeding the industry average of 13.77X.
Image Source: Zacks Investment Research
The premium valuation suggests that investors have strong expectations for lululemon’s future performance and growth potential. However, the stock currently seems somewhat overvalued. As a result, investors might be hesitant to buy at these elevated levels and prefer to wait for a more favorable entry point.
Investment Thesis
lululemon is navigating several notable challenges. Rising inflation and higher interest rates are dampening consumer spending, particularly on discretionary goods, prompting shoppers to become more selective. These pressures have posed significant hurdles for luxury retail brands, especially in the Americas. Despite this, lululemon is benefiting from its Power of Three X2 growth strategy, which aims to double net revenues to $12.5 billion by 2026, suggesting growth from the $6.25 billion reported in 2021. The strategy also focuses on expanding its presence in underpenetrated international markets and growing its share in the men’s category.
lululemon is particularly optimistic about its potential in international markets, notably China, which represents a substantial opportunity. The company plans to quadruple its international revenues over time, with a goal of these markets contributing nearly 50% of total sales. Alongside its physical retail expansion, lululemon is leveraging its digital capabilities to drive sales and deepen customer engagement.
Conclusion
No matter how the LULU stock reacts to its third-quarter fiscal 2024 earnings, it remains a solid long-term investment due to its robust fundamentals. With strong profitability and a growing global presence, lululemon offers a compelling opportunity for long-term investors. If you already own LULU stock, hold steady, as the upcoming earnings report is expected to reinforce the company’s strong performance.
Research Chief Names "Single Best Pick to Double"
From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all.
This company targets millennial and Gen Z audiences, generating nearly $1 billion in revenue last quarter alone. A recent pullback makes now an ideal time to jump aboard. Of course, all our elite picks aren’t winners but this one could far surpass earlier Zacks’ Stocks Set to Double like Nano-X Imaging which shot up +129.6% in little more than 9 months.
Free: See Our Top Stock And 4 Runners UpV.F. Corporation (VFC) : Free Stock Analysis Report
Guess?, Inc. (GES) : Free Stock Analysis Report
lululemon athletica inc. (LULU) : Free Stock Analysis Report
G-III Apparel Group, LTD. (GIII) : Free Stock Analysis Report
To read this article on Zacks.com click here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
