Lululemon: growth story is not such a stretch

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Lululemon’s founder and former chief executive caused an uproar a decade ago when he blamed customer bodies for wear and tear problems with his company’s yoga attire. The comments briefly left Lululemon out of fashion. But that firestorm is a distant memory. 

Lululemon is a rare retail beast. Its tills have kept ringing despite a challenging environment for apparel retailers. Having well-heeled customers helps. So does the push to develop its direct-to-consumer business and overseas sales. Combined, these measures should help the yoga-inspired activewear brand successfully navigate the turbulent US retail landscape.

The company’s latest quarterly earnings suggest as much. Lululemon raised its full-year guidance on Thursday after reporting an 18 per cent jump in both sales and net income for its fiscal second quarter. It said revenue for 2023 could increase by as much as 18 per cent. Diluted earnings per share are expected to come in at between $12.02 and $12.17 for the year, up from the $11.74 to $11.94 range it gave three months ago.

The upbeat outlook stands in stark contrast to the more cautious comments from Peloton and Nike which court similar fitness enthusiast dollars.

Sales in North America were up 11 per cent during the quarter as its higher income consumers continued to snap up workout staples. But it is the strong growth in China that was particularly eye-catching. Revenue there rose 61 per cent. The country generated $681mn in revenue last year and is Lululemon’s third-biggest market after the US and Canada. The company says demand has remained strong even as China’s economy slows. 

Lululemon’s shares, up 22 per cent this year, are trading on 30 times forward earnings. That looks expensive when compared with Under Armour’s 15 times multiple, although not when compared with the 80 times on which Lululemon traded during the pandemic. Fast growth can justify high multiples. Investors should get on the mat.

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