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Lululemon’s Valuation Leaves Little Room For Misstep From Athleisure Brand

  • Lululemon reported earnings barely forward of expectations
  • Presently buying and selling about 25% beneath the 52-week excessive
  • Wall Road analyst consensus is bullish
  • Market-implied outlook is reasonably bearish as much as early 2023
  • For instruments, knowledge, and content material that can assist you make higher investing selections, attempt InvestingPro+.

Lululemon Athletica (NASDAQ:) has constructed an athletic clothes model that has considerably outlined the excessive finish of athletic leisure put on. Yoga pants, as soon as worn primarily for train courses, have change into a staple in informal vogue. The shares have loved an enormous rally in recent times, with 3- and 5-year annualized returns of 26.2% per 12 months and 46.8% per 12 months, respectively.

The Vancouver, Canada-based leisure put on big is presently buying and selling about 25% beneath its 12-month excessive closing value of $477.91 recorded Nov.16, 2021. Whereas Nike (NYSE:) has been in a gentle decline over the previous six months, with a return of -25% YTD, LULU has rallied from its 12-month low in mid-March and is barely down 9.4% thus far in 2022.

LULU 12-Month Price History.

Supply: Investing.com

Certainly one of Lululemon’s strengths is that the corporate manages development expectations very nicely and has persistently overwhelmed quarterly consensus earnings estimates. Most not too long ago, the corporate reported FY 2022 on Mar. 29, with EPS of $3.37 versus an anticipated worth of $3.28. This monitor document provides to the company’s credibility when it lays out plans for future development.

Trailing and estimated future quarterly EPS for LULU.

Supply: E-Commerce

To take care of its development price, the corporate is forecasting for the next five years, LULU must double the dimensions of its males’s put on enterprise and e-commerce, in addition to develop worldwide gross sales by an element of 4. Provided that some of the growth prior to now couple of years is attributed to individuals dressing extra comfortably when working from dwelling through the pandemic, the query is how gross sales could change as extra individuals return to the workplace.

Whereas administration is executing nicely, the inventory has a ahead P/E of 38 and a TTM P/E of 47.3. This degree of valuation depends upon continued sturdy development and, consequently, makes the inventory’s efficiency fairly delicate to rising rates of interest. When an organization is counting on excessive future earnings as the muse for the valuation, the inventory is extra aware of adjustments within the low cost price, which rises and falls with rates of interest.

On Sept. 8, 2021, I assigned a bullish/purchase score and within the nearly eight months since, LULU has returned a complete of -7.3% vs. -8.6% for the S&P 500 (NYSE:), together with dividends. At the moment, LULU had a ahead P/E of 57.1, nicely above the ahead P/E ratios of 38.5 for Nike and 36.2 for Below Armour (NYSE:). The valuation was excessive, even given the sturdy development outlook.

The Wall Road consensus score was bullish, with a consensus 12-month value goal that was 13.6% above the share value at the moment, in line with E-Commerce, however solely 3.9% above the share value utilizing the Wall Road consensus calculated by Investing.com. This vary of anticipated return was not terribly excessive given the dangers (the anticipated volatility was about 36%).

Along with the basics and the Wall Road consensus outlook, I depend on the market-implied outlook, which represents the consensus view from the choices market, when analyzing a inventory. The market-implied outlook in early September of 2021, searching to March of 2022, was bullish.

For readers who’re unfamiliar with the market-implied outlook, a quick clarification is required. The worth of an possibility on a inventory displays the market’s estimate of the likelihood that the inventory value will rise above (name possibility) or fall beneath (put possibility) a particular degree (the choice strike value) between now and when the choice expires. By analyzing the costs of put and name choices, all with the identical expiration date, it’s attainable to calculate a possible value forecast for the inventory that reconciles the choices costs. That is the market-implied outlook. For a deeper dialogue than is supplied right here and within the earlier hyperlink, take a look at this excellent monograph revealed by the CFA Institute.

I’ve calculated the market-implied outlook for LULU to early 2023 and I’ve in contrast this with the present Wall Road consensus outlook in revisiting my score on the inventory.

Wall Road Consensus Outlook For LULU

E-Commerce calculates the Wall Road consensus outlook for LULU by aggregating the views of twenty-two ranked analysts who’ve revealed rankings and value targets over the previous three months. The consensus score is bullish, because it has been for all the previous 12 months, and the consensus 12-month value goal is 20.2% above the present share value.

One notice of warning right here is that there’s a massive unfold between the best and lowest analyst value targets. Excessive dispersion in value targets makes the consensus less meaningful as a predictor of the long run share value. The bottom analyst value goal is, nonetheless, one thing of an outlier, with the subsequent three lowest value targets all at about $340.

Analyst Consensus Rating And 12-Month Price Target For LULU.

Supply: E-Commerce

Investing.com calculates the Wall Road consensus utilizing rankings and value targets from 32 analysts. The consensus score is bullish and the consensus 12-month value goal is 22.1% above the present share value. The unfold between the best and lowest value targets is excessive, according to the outcomes from E-Commerce.

Analyst Consensus Rating And 12-Month Price Target For LULU.

Supply: Investing.com

The Wall Road analyst consensus outlook for LULU predicts a 12-month return of round 20%, considerably beneath the annualized price of return over the previous three years. Whereas there’s pretty excessive dispersion among the many value targets, that is exacerbated by outlier results.

Market-Implied Outlook For LULU

I’ve calculated the market-implied outlook for LULU for the 8.6-month interval from now till Jan. 20, 2023, utilizing the value of name and put choices that expire on this date. I selected to research the January choices to supply a view via the tip of the 12 months.

The usual presentation of the market-implied outlook is a likelihood distribution of value return, with likelihood on the vertical axis and return on the horizontal.

Market-Implied Price Return Probabilities For LULU Until Jan. 20.

Supply: Creator’s calculations utilizing choices quotes from E-Commerce

The market-implied outlook to Jan. 20, 2023, is tilted to favor detrimental returns (bearish). The utmost likelihood corresponds to a value return of -15.8% for this era. The anticipated volatility calculated from this outlook is 44%, considerably larger than the anticipated volatility calculated in September, though market volatility () has additionally elevated considerably over this era.

To make it simpler to instantly evaluate the chances of constructive and detrimental returns, I rotate the detrimental return facet of the distribution in regards to the vertical axis (see chart beneath).

Market-Implied Price Return Probabilities For LULU Until Jan. 20.

Supply: Creator’s calculations utilizing choices quotes from E-Commerce

This view highlights the consistency with which the chances of detrimental returns are larger than the chances of constructive returns of the identical magnitude throughout a variety of probably the most possible outcomes (the dashed crimson line is above the strong blue line over a lot of the left two-thirds of the chart above). It is a bearish outlook.

Concept signifies that the market-implied outlook is predicted to have a detrimental bias as a result of buyers, in combination, are typically risk-averse and, consequently, overpay for draw back safety (e.g. put choices). There is no such thing as a strategy to measure whether or not this bias is current, nonetheless. Even contemplating that the market-implied outlook most likely overstates the chances of loss, I interpret this outlook as reasonably bearish. As well as, this market-implied outlook is markedly extra detrimental than the outcomes from September.


Lululemon has constructed a premium athletic leisure model, which has benefited from a pandemic-driven work-from-home increase. The query is whether or not the valuation displays cheap development expectations. Whereas administration has demonstrated the power to ship on its imaginative and prescient, the present targets are very bold and the valuation leaves restricted room for missteps.

The Wall Road consensus outlook continues to be bullish, and the consensus 12-month value goal implies a reasonably excessive return, largely due to the share value declines from late 2021. As a rule of thumb for assigning a purchase score, I wish to see an anticipated 12-month return that’s no less than half the anticipated volatility (44%) and the typical of the 2 consensus value targets, 21.2%, is true on the threshold. Taking the analyst consensus value goal at face worth, the anticipated return is just not particularly excessive relative to the anticipated threat degree.

The market-implied outlook to early 2023 is reasonably bearish, in marked distinction to the market-implied outlook from September. The choices market’s consensus view has change into extra detrimental. Contemplating all of those components, I’m altering my score on LULU to impartial.

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