lululemon Q1 Outlook Reflects Measured Optimism: Buy Before Earnings?

Core Viewpoint - lululemon athletica inc. (LULU) is expected to report growth in both sales and earnings for the first quarter of fiscal 2025, with sales estimated at $2.35 billion, reflecting a 6.6% increase year-over-year [1] Financial Performance - The consensus estimate for fiscal fourth-quarter earnings is $2.58 per share, indicating a 1.6% growth from the previous year [2] - lululemon has a trailing four-quarter earnings surprise average of 6.6%, suggesting a strong performance trend [2] - The company anticipates EPS for the first quarter to be between $2.53 and $2.58, compared to $2.54 in the prior-year quarter [10] Growth Drivers - Continued business momentum is expected in Q1, driven by positive consumer response, increased in-store traffic, and robust online performance [4] - The company is benefiting from strong international market performance, particularly in Mainland China, with a predicted 2.3% year-over-year revenue increase [6] - lululemon's Power of Three x2 growth plan focuses on product innovation, guest experience, and market expansion, which are crucial for brand awareness and customer loyalty [5][19] Challenges - The company faces challenges from inflation and higher interest rates, leading to soft discretionary spending and struggles in the women's category in the Americas [7][18] - Tariff dynamics are expected to negatively impact margins due to elevated costs, with management expressing concerns over rising tariffs on imports from Mexico and China [8] - The gross margin is expected to remain flat year-over-year, with a decline in operating margin anticipated [9][10] Market Performance - lululemon's shares have declined 8.9% over the past three months, underperforming the industry and broader market indices [11] - The stock currently trades at a forward 12-month P/E multiple of 20.74X, above the industry average of 12.72X, indicating strong investor expectations but potential overvaluation [15][17] Long-term Outlook - Despite near-term challenges, lululemon's long-term growth strategy remains intact, with a goal to double net revenues to $12.5 billion by 2026 [19] - The company aims to quadruple international revenues, targeting nearly 50% of total sales from these markets [20] - lululemon's strategic initiatives and international growth are expected to drive sustained value over time, making it a fundamentally strong business [21][22]