Lululemon Athletica’s (NASDAQ:LULU) first quarter sales bounced back from last year’s pandemic-induced drop. That said, the recovery hasn’t been smooth. The athletic apparel maker is facing a new set of challenges regarding its supply chain and material shortages, and investors will be eager to understand its impact when the company reports earnings tomorrow.
With economies reopening and more people visiting stores in person, customer-interest is obviously expanding compared to last year. Furthermore, the warmer weather means people are indulging in outdoor fitness activities more frequently, which means the company’s second quarter sales should be driven by a seasonal tailwind as well. The difficulty, however, is in meeting that customer demand in a cost-effective manner.
NKE) often sells its products through retailers like Nordstrom and Macy’s. Nike has to sell its products to the aforementioned chains at lower prices so they can make a profit, too, and that eats into Nike’s margins. /p
pIndeed, Lululemon averaged an operating profit margin of 21.2% over the last decade, while Nike averaged 13.2%. And during the same time, Lululemon is growing revenue at more than double the rate Nike has. The higher profit margin can partly be attributed to its robust digital channel, while the higher growth is partly due to starting from a smaller revenue base./p
p What this could mean for investors /p
pAnalysts on Wall Street expect Lululemon to report revenue of $1.33 billion and earnings per share of $1.18 in the second quarter. If the company reports the estimated EPS growth, it would be a 59% increase from the year prior. /p
p img alt="A chart comparing Nike and Lululemon price to earnings ratios." src="https://g.foolcdn.com/image/?url=https%3A%2F%2Fg.foolcdn.com%2Feditorial%2Fimages%2F641435%2Fnikelulu.png&w=700&op=resize" srcset="https://g.foolcdn.com/image/?url=https%3A//g.foolcdn.com/editorial/images/641435/nikelulu.png&w=300&op=resize 300w, a href="https://g.foolcdn.com/image/?url=https%3A//g.foolcdn.com/editorial/images/641435/nikelulu.png&w=1000&op=resize"g.foolcdn.com/image/?url=https%3A//g.foolcdn.com/editorial/images/641435/nikelulu.png&w=1000&op=resize/a 1000w, a href="https://g.foolcdn.com/image/?url=https%3A//g.foolcdn.com/editorial/images/641435/nikelulu.png&w=2000&op=resize"g.foolcdn.com/image/?url=https%3A//g.foolcdn.com/editorial/images/641435/nikelulu.png&w=2000&op=resize/a 2000w”/>
Data source: YCharts.
With the worst of the pandemic behind it, Lululemon looks to be in a great position. It’s trading at a forward P/E of 58, compared to 38 for Nike (see chart). However, the premium could be justified considering Lululemon operates at much better profit margins and grows revenue faster than Nike. Long-term investors can feel good about adding the stock to their portfolio.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
