In the long run, growth and pricing power will be limited as the athleisure fashion trend fades and as competitors including Nike, Under Armour and Athleta increase their market share.
has updated its fourth-quarter guidance to come in at the high end of its previously stated range following a strong holiday season. The company is now looking for mid-single-digit comparable sales growth in the fourth quarter and diluted earnings per share of $0.99-$1.01, versus prior guidance for mid-single-digit comparable sales growth and $0.96-$1.01 EPS. We are not surprised by Lululemon’s ability to achieve its goals, given strong ongoing demand for athleisure and consumer willingness to pay a premium for technically differentiated products. We continue to attribute the weakness seen earlier at Macy’s and Kohl’s to a subsector in secular decline and not to overall apparel category weakness. As our model already accounted for Lululemon’s fourth quarter growth prospects (we model earnings of $1.02 and still believe the company is on track to come in slightly ahead of updated guidance), we see no change to our $64 fair value estimate and view shares as fairly valued.
Bridget Weishaar is a senior equity analyst for Morningstar.
In the long run, we still think that Lululemon lacks an economic moat and that growth and pricing power will be limited as the athleisure fashion trend fades and as competitors including Nike, Under Armour, and Athleta increase their market share. We acknowledge that reduction in air freight, improved logistics, and other efficiencies will drive some recovery in operating margin. However, we think the company will be unable to return to operating margins in the mid-20% range as pricing power diminishes. Therefore, we remain comfortable with our long-term outlook calling for low-double-digit average annual top-line growth and operating margin expansion to 21% from 18% currently over the next five years.
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