Although Lululemon has a brand synonymous with quality and innovation, we expect little market share gain as other high quality competitors have flooded the space.
We see little change to no-moat Lululemon
's $62 fair value estimate after third-quarter earnings that were slightly ahead of our expectation (7% comparable sales growth versus our 4% estimate). Although comp performance averaged 7% in the first three quarters, the first three weeks of November were weak (but have since recovered). As such, we are comfortable with our full-year estimate calling for mid-single-digit comparable sales growth and adjusted earnings per share of $2.14, in line with the company’s updated guidance of $2.11 to $2.16.
Bridget Weishaar is a senior equity analyst for Morningstar.
We continue to think that, although Lululemon has a brand synonymous with quality and innovation, comparable sales growth will remain in the midsingle digits in the long run (implying little market share gain) as other high quality competitors have flooded the space, including Nike and Under Armour. We also stand by our belief that store growth can continue at midteen levels given underpenetration in international markets (89% of stores are in the U.S. and Canada) and that this additional scale, as well as supply chain improvements, will contribute to operating margin expansion. However, we think more limited pricing power will prevent margin from reaching historic mid- to high-20s levels. Therefore, we stand by our estimates calling for average annual low-double-digit revenue growth and operating margin expansion from the high teens to low 20s over the next five years.
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