L.ululemon (LULU) will announce the results for the fourth quarter of the 2021 financial year after the closing bell on Tuesday. While the yoga sportswear specialist continues to dominate the retail sector and pursue a successful strategy to drive the mundane health and wellness trend forward, valuation fears have surfaced.
After rallying 56% last year, Lululemon stock is down 10% year-to-date, followed by the S&P 500 index rising 6%. Competition concerns from the likes of Nike (OF) and Under Armor (UA) have put pressure on the share, among other things. However, those fears seem misplaced given the company’s strong Q3 results, which puts LULU on the right track to surpass its growth plan despite the pandemic disruptions.
The LULU share price is trading with a 69-fold forward P / E ratio and a 9.5-fold forward price-to-sales ratio well above the S&P 500 index and on Tuesday is not just about another beat-and- Raise quarter, but also from flawless execution forward. However, it’s not the first time Lululemon, capable of dominating a $ 3 trillion global wellness market, has heard the valuation argument. This seems like a good buying opportunity for investors with a longer-term horizon.
The company operates more than 500 sportswear stores worldwide and continues to expand internationally. At the same time, it is expanding its online direct customer business. Sales growth outside North America reached 45% in the third quarter and rebounded well from the first two quarters. In order for the stock to return to its growth trajectory, the company must provide updates on its growth initiatives, including men’s and digital revenue categories, on Tuesday while forecasting profit margin expansion.
For the quarter that ended in February, Wall Street expects the Vancouver-based apparel maker to make $ 2.49 per share on sales of $ 1.66 billion. This compares to the same quarter last year when earnings were $ 2.28 per share on revenue of $ 1.48 billion. Full year earnings of $ 4.58 per share are expected, compared to $ 4.93 a year ago, while full year revenue of $ 4.33 billion would increase 8.9% year over year.
Despite the lower productivity of its physical stores, the company posted strong top-line growth last quarter, which further shows why it is clearly a leader in its category. Third quarter revenue increased 22% year over year to $ 1.12 billion, slightly beating estimates of $ 1.05 billion. The beat was notable given the capacity constraints the company has experienced in some markets due to the pandemic. LULU benefited from its direct-to-consumer channel, which accounted for 43% of total sales, while digital comps grew 93% year over year.
The bottom line was equally impressive: it was up 21% year over year to $ 1.16, above the consensus of $ 1.10. The company’s third quarter results showed the implementation of the various key metrics management is targeting, including men’s sales which are up 14% year over year. The youngest company Acquisition von MIRROR also increased sales in the quarter. The company announced that it now expects MIRROR sales in excess of $ 150 million, compared to previous estimates of $ 100 million.
Given that LULU only paid $ 500 million for MIRROR, the expectation of over $ 150 million in sales (and growth) suggests the deal will soon be amortized. Investors are curious to see whether these growth trends can continue in the areas of MIRROR, men’s category and e-commerce, among others. In this case, LULU’s recent stock pullback may have stretched too far in the wrong direction.
The views and opinions expressed are those of the author and do not necessarily reflect those of Nasdaq, Inc.