LULU Stock, A Warren Buffet Favorite, Profits Expected To Soar In Coming Years

Not many can predict fashion trends, and even fewer can foresee which publicly traded clothing brands will take off. However, if an investor had taken a gamble in 1998 on a small yoga studio in Vancouver that also sold athletic apparel, it wouldn’t have been a bad bet.

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Two decades later, Lululemon Athletica (LULU) is soaring and LULU stock — a Warren Buffett favorite — remains a good wager. And analysts see booming profits in coming years for Lululemon.

Lululemon is a yoga-inspired, technical athletic apparel company with clothing for men and women that it calls athleisure wear. Chip Wilson founded the company in the late 1990s, with a single store in 2000.

Seven years later in July 2007, LULU stock went public with an initial public offering of 18.2 million shares at $18, raising $327.6 million. On July 30, the first day Lululemon traded on the New York Stock Exchange, shares closed at 29.98.

Warren Buffett’s Picks: GOOGL, LULU And Others On This Screen

Lululemon stock has grown 13-fold since 2007 and its reach has multiplied to 655 stores, competing with industry titans Nike (NKE), Adidas (ADDY), Under Armour (UAA) and others. Analysts project Lululemon annual profits ballooning 119% to $22.10 per share in the next five years. Meanwhile, Wall Street forecasts revenue soaring 76% to $14.29 billion in 2027.

LULU Stock: A Plan For Success

Last spring, Lululemon launched its five-year growth plan, nicknamed “Power of Three x2” by executives. The strategy calls for the doubling of the business from 2021 net revenue of $6.25 billion to $12.5 billion by 2026.

Executives have said the plan is to focus on product innovation, consumer and guest experience and market expansion to achieve this goal. Lululemon also is focusing on doubling its men’s products segment. Also, it plans to double direct to consumer sales and quadruple international revenue relative to 2021.

Chief Executive Calvin McDonald told investors during the most recent earnings call the plan assumes a compound annual revenue growth rate, or CAGR, of 15%. In 2022, Lululemon grew revenue 30% compared to 21 and 27% on a three-year CAGR basis.

“It is a testament to the strength of our brand that for the full year 2022 we were able to significantly exceed our annual revenue goal,” McDonald said on March 28. “We achieved these results despite the challenging macro backdrop, supply chain issues and the pressure of Covid-19 in China.”

McDonald added “business remains good in quarter one and we are looking forward to another strong year in 2023.”

Lululemon Stock Fundamentals

LULU stock has formed a cup base and appears to be working on a handle, according to MarketSmith analysis of a weekly chart. On a daily chart, Lululemon had formed a cup-with-handle and is slightly extended above a 371.36 buy point. However, LULU stock on a weekly chart is hovering around a 386.80 buy point.

Lululemon has gained around 34% since hitting a March 15 low of 286.58. On March 28, Lululemon hiked its 2023 outlook after topping earnings and revenue estimates for the fourth quarter. That sparked a 12.7% LULU stock surge the next day.

Lululemon earnings jumped nearly 31% to $4.40 a share in the fourth quarter while revenue popped 30% to $2.8 billion. Gross margins fell 300 basis points to 55.1%. Adjusted gross margin slid 70 basis points to 57.4%. Inventories were up 50% vs. a year earlier to $1.4 billion. That’s after third-quarter inventories leapt 85% to $1.7 billion.

Lululemon Saying Goodbye To At-Home Fitness?

Earlier this year, Lululemon appeared optimistic about diversifying its business segment with memberships and its at-home fitness business Lululemon Studio, formerly known as Mirror.

Lululemon acquired Mirror, and its interactive workout platform, for $500 million during the 2020 surge for at-home fitness options.

Closing out 2022, Lululemon touted how it launched a two-tier membership program in October 2022 and planned to expand the Lululemon Studio premium tier. That will enable guests to access digital fitness content via a new app, launching in summer 2023, for a lower monthly fee.

Lululemon announced at the end of March it was “evolving” its at-home fitness business strategy with plans to focus on digital app-based services. In its fourth-quarter earnings, Lululemon disclosed a $443 million impairment charge related to Mirror.

On April 18, media reports emerged Lululemon is looking to sell the at-home fitness business. Bloomberg News reported Lululemon was working with an adviser to solicit interest in the business. CNBC later reported Hydrow, a private startup that makes in-home rowing machines, has interest in a deal with Lululemon.

Analysts Weigh In On LULU

Morgan Stanley analyst Alexandra Straton says Lululemon is a “top line grower” supported by multiple factors including market share gain opportunities.

“LULU dominates the [North America] athletic yoga apparel category due to its unique brand positioning and fashionable products,” Straton said in a recent note to clients. “Covid accelerated consumers’ health & wellness focus & fashion casualization, both of which should benefit LULU.”

TD Cowen analyst Dan Brennan recently put an “outperform” rating on Lululemon stock and raised the price target to 525, up from the previous 500. In his note to clients, Brennan said sales trend “suggest a bullish read for the international mix shift.”

Meanwhile, Bank of America (BAC) analyst Lorraine Hutchinson recently raised the firm’s LULU stock price target to 450, up from 410, and maintained a “buy” rating on the shares. Hutchinson wrote Lululemon continues to “balance its historically grassroots-oriented marketing program with several more meaningful campaigns.”

Hutchinson added Lululemon’s work to gain traction and China is a key near and long-term driver.

LULU Stock: What To Expect In 2023

Lululemon predicts revenue of $1.89 billion to $1.93 billion, an increase of 18%, for the first quarter with earnings at $1.93 to $2.00 a share.

For 2023, Lululemon expects sales of $9.3 billion to $9.41 billion, growing 15%. At the end of March, it predicted earnings of $11.50-$11.72 per share for the year.

Analysts see earnings growing 31% to $1.94 per share in the first quarter with sales increasing 19% to $1.91 billion. For 2023, Wall Street forecasts earnings of $11.56 a share, jumping 15% compared with 2022. Revenue is projected to advance 15% to total $9.31 billion.

With analysts expecting Lululemon profits to grow in the coming years, so too is the athleisure clothing market.

Keeping An Eye On China

The U.S. athleisure market is expected to grow from $87.2 billion in 2022 to around $140 billion in 2027, with a compound annual growth rate of 8.3%, according to a Grand View Research report. Other market research has the athleisure market growing at a growth rate around 10% through 2023.

Meanwhile, Lululemon has its eye on China. The CEO told investors the company’s “potential continues to be significant” in the region.

“As the impacts of Covid-19 normalize, we are seeing our momentum accelerate and we are excited for the opportunities in the region in 2023 and beyond” McDonald told analysts in late March.

Lululemon ranks first in its IBD Retail-Apparel industry group. Shares have a 97 Composite Rating out of 99. LULU stock has a 92 Relative Strength Rating, an exclusive IBD Stock Checkup gauge for share-price movement. The EPS rating for Lululemon stock is 98.

Please follow Kit Norton on Twitter @KitNorton for more coverage.

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