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Shares of retail company Lululemon (NASDAQ: LULU) were up 12.7% on Wednesday following its quarterly results for fiscal Q4 of 2023 (ended in January). Lululemon reported revenue of $2.77 billion and adjusted earnings of $4.40 per share in Q4. Comparatively, Wall Street forecast it to report revenue of $2.7 billion and earnings of $4.26 in the January quarter.
According to Lululemon, strong sales in the holiday season drove top-line growth, which suggests high-income shoppers continue to buy its products despite rising prices.
It now expects revenue to range between $9.3 billion and $9.41 billion in fiscal 2024, which is higher than consensus estimates of $9.14 billion. Moreover, it forecast adjusted earnings between $11.5 and $11.72 per share, again higher than estimates of $11.26 per share
Lululemon’s revenue and earnings beat, coupled with solid guidance, allowed LULU stock to gain significant pace this week.
What impact Lululemon's sales and profits in fiscal Q4 of 2023?
Lululemon is a Canada-based athletic apparel retailer which increased comparable sales by 27% year over year in Q4. Also known as same-store sales, it includes revenue generated from stores that were open for a period of more than 12 months.
Lululemon is part of the highly cluttered and highly competitive retail sector. But it is among the few companies that are well-poised to have a long pathway for growth. Investors and analysts remain bullish on Lululemon and see massive upside potential on the back of rapidly expanding international sales and rising revenue in the men’s business.
Similar to several other retail companies, a higher pricing environment and elevated inflation levels in 2022 increased Lululemon’s inventory by 85% year over year last December. It, however, ended the fiscal year with a 50% rise in inventories.
In fact, in a CNBC interview, company CEO Calvin McDonald emphasized Lululemon does not have an inventory issue and that the rise of the same in recent months fueled its business in Q4.
McDonald stated, “We’ve been beating our guidance on managing that inventory down without markdowns through whole price sale, and we’ve delivered on that. We’re confident we’ve guided to, again in this quarter, having inventory up 30-35% at the end of it, in line with sales in the back half of the year.”
McDonald was also upbeat about Lululemon’s revenue growth in Q4 as overall sales declined in the athletic apparel industry. So, Q4 was the highest quarterly market share gain for Lululemon ever since it started tracking these numbers three years back.
What next for LULU stock price and investors?
Lululemon acquired Mirror in 2020, and this purchase was expected to fuel revenue growth for the company. But Mirror failed to increase its base of subscribers even though Lululemon has millions of fans globally.
In the next 12 months, Lululemon expects sales to rise around 15% year over year and forecast it to surpass $12.5 billion in 2026. So, it will have to grow sales at an annual rate of 12% to achieve revenue forecasts in the next four years.
Valued at a market cap of $46 billion, LULU stock is down 24% from all-time highs. Given consensus estimates, Lululemon stock is trading at 5x forward sales and 32x forward earnings, which is steep.
But a quality growth company commands a premium valuation as Lululemon stock is trading at a discount of 10% given consensus price target estimates.
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