Athletic apparel company Lululemon Athletica(NASDAQ: LULU) is now entering its third year of a five-year plan to create shareholder value. The company finished fiscal 2021 (ended Jan. 2022) with $6.3 billion in revenue. Management then set a goal to double the top line to $12.5 billion by fiscal 2026.
Not only is Lululemon on pace to succeed, but it's also looking to grow its earnings per share (EPS) at a faster pace than revenue. In other words, it expects EPS to more than double during this five-year period. Considering it had diluted EPS of $7.49 in fiscal 2021, this would push earnings above $15 per share in fiscal 2026.
Can Lululemon hit these financial goals on time? And more importantly, what would the stock be worth if it succeeds?
Is Lululemon on pace to hit its goals?
To double its revenue in five years, Lululemon would need its top line to grow at a roughly 15% compound annual rate. Its results, therefore, are quite encouraging. In fiscal 2022 (year one in its five-year plan), revenue was up 30%.
Lululemon won't report completed fiscal 2023 results until March 21, but management expects to report full-year revenue of almost $9.6 billion, which would be another 18% annual growth. Therefore, the company's business is firmly on pace to meet the targets that management set two years ago.
One element of Lululemon's growth plans is an emphasis on men's apparel (the brand already has high appeal among women). Results here are encouraging, considering the company's men's business enjoyed 15% growth in its fiscal 2023 third quarter.
There's still opportunity, considering the company's brand awareness for men in the U.S. remains low at only 13%. Lululemon hopes to increase awareness with new product offerings, including its first men's shoes, which just launched in February.
Lululemon is also emphasizing growth in international markets, and again, the results are encouraging. In the company's fiscal 2022, international revenue was up 35%, compared to only 29% growth in North America. And in fiscal Q3, international revenue was up 49% year over year, compared to only 12% growth in North America.
So there are multiple reasons to believe Lululemon's management is executing its five-year plan to perfection. Assuming the company achieves its fiscal 2026 goals on time, this will be a $12.5 billion business within three years.
Here's what Lululemon might be worth
I've just laid out how big Lululemon's business could be in fiscal 2026. However, it can be hard to predict what the market will think this business is worth -- valuations can be subjective and prone to fluctuation.
But investors can look to Lululemon's past valuation as a guide for predicting its future valuation. The below chart shows the 10-year averages for the company's price-to-sales (P/S) valuation and price-to-earnings (P/E) valuation.
Data by YCharts.
As the chart shows, Lululemon has averaged a P/S ratio of about 6 over the last decade. Assuming this number holds, the company would be worth $75 billion on $12.5 billion of revenue in fiscal 2026.
For perspective, Lululemon's market cap is $59 billion as of this writing, which represents roughly 27% upside from today's price over the next three years. This would make Lululemon stock an average to slightly above-average performer over the next three years, given the historical returns of the S&P 500.
Modeling Lululemon stock on a P/E basis yields a similar outcome. Let's say it earns $15 per share in fiscal 2026 as management hopes. Since it's averaged a P/E of 45 over the last decade, that same valuation would give it a stock price of $675 per share, more than 40% higher than where it trades now.
What's the takeaway?
The point of this article isn't to predict Lululemon's future stock price with precision -- it's to see what's reasonable, given the trajectory of the business. Given everything I've laid out here, it's reasonable to believe Lululemon can modestly outperform the broad market. This can be a reason for shareholders to continue to hold the stock.
It's also reasonable to believe that market-beating results over the next three years will be hard to come by. To me, it looks like it will be closer to an average performer. For those looking to start a position in Lululemon today, it may be better to keep waiting for a better entry point.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica. The Motley Fool has a disclosure policy.
