Buy The Dip In Lululemon Athletica (NASDAQ:LULU)

Another Case Of Too Little Too Late

Shares of Lululemon Athletica (NASDAQ:LULU) are down another 5% in premarket trading bringing the stock dangerously close to correction territory. Another 3.0% and the total loss since hitting the all-time high just last week will come to 20%. That’s not great, not if you bought the stock recently, but that doesn’t mean you should worry. This is a natural correction within a bull market and one opening up a great entry point for new money.

Lululemon Athletica did not deliver a bad report. The company did not give weak guidance. Far from it. What the company did do was deliver a great report at the end of a great reporting season when all that good sentiment was baked into the cake. What investors need to remember is the Q2 results are heavily impacted by the pandemic. Much of the quarter was affected by store closures, and yet Lululemon delivered growth.

Lululemon Athletica Is At An Inflection Point

The Q2 results are good no two ways about it. The company delivered top-line growth of 2.2% despite a quarter deeply impacted by store closures. The $55.56 million reported is 650 basis points above consensus and driven by eCommerce and direct-to-consumer sales. eCommerce and direct-to-consumer grew 157% on a YOY basis and accounted for more than 61.0% of sales. That’s an important fact to remember because it’s the brands with strong eCommerce that are best-positioned to survive and thrive in the post-pandemic environment.

Another important factor is the margins. Lululemon’s margins shrank minimally at the gross and operating level but beat consensus by wide margins. The shift to eCommerce comes at a price and Lululemon seems to be navigating the change well. The bottom-line results were strong because of it with both Adjusted and GAAP EPS beating consensus. Adjusted EPS of $0.74 beat by $0.18, GAAP EPS of $0.66 by $0.11.

Perhaps the most important factor is management commentary and forward guidance. The company did not offer formal guidance citing the pandemic but made a number of comments that point to accelerated growth in the current and future quarters.

 "As trends around the world are shifting to working and sweating from home with an increased focus on health and wellness, we believe 2020 is likely an inflection point for retail and for lululemon... We are cautiously optimistic with regard to the second half of the year as we continue to navigate the uncertain environment."

 The Analysts Are Already Doubling-Down On Their Bullish Calls

 Analyst Camilo Lyon of Susquehanna is the first to sound off in the wake of Lululemon’s earnings report. According to the note, the buy thesis remains intact as Lulu is an international growth story and supported by secular tailwinds. The firm maintained its buy rating on the stock and a near-Street-high price target of $426. The stock is trading near $330 in the pre-market action or about 20% below the $426 target.

 The Technical Outlook: Lululemon Falls To Strong Support Level

Shares of Lululemon have taken a beating over the last week and providing an opportunity today. The premarket selloff has shares down nearly 20% from the peak and trading just above a strong support level. The support level is near $325 and should be strong based on previous price action. It is very likely we will see this level tested, if not today then very soon, and when it is I expect to see buyers step in scoop up this bargain. A touch to $325 could be used as a trigger for entry but waiting for a confirmed bounce at support is the better strategy.