Is Lululemon (NASDAQ: LULU) a Buy Ahead of Earnings?

Lululemon NASDAQ: LULU is set to report its Q3 earnings tomorrow. The athletic apparel retailer is trading at 11.7x forward sales and 88.2x forward earnings – a lofty valuation for a non-tech company.

Though Lululemon isn’t a tech company, it innovates like one. On the Q2 call, for example, management used the word “innovation” 10 times. And it’s not just an empty promise: Lululemon’s customers swear by the company’s products, pointing to the new options and continual improvement of existing options.

Let’s start by looking at Lululemon’s long-term picture, before figuring out the best way to play LULU ahead of Q3 earnings.

Five-Year Growth Plan is Ambitious But Attainable

In April of 2019, management unveiled a five-year growth plan, including doubling the men’s business, doubling e-commerce, and quadrupling international by 2023.

On the Q3 2019 earnings call, CEO Calvin McDonald said that Lululemon was “firmly on track to deliver” on the five-year growth plan. On the Q2 2020 call, Lululemon re-affirmed its commitment to the plan.

Lululemon made strong progress on all three fronts in Q2 2020:

• The men’s business “saw a sequential improvement relative to quarter one, although it lagged behind the growth in the women's business.”
• E-commerce sales increased 157% yoy.
• International was up 37% yoy with growth in every region in Europe, APAC, and China.

The e-commerce growth is nice to see, but nothing special considering the context. Store closures heavily impacted Q2 results, with LULU delivering top-line growth of just 2.2% in Q2. E-commerce merely made up for a brick-and-mortar shortfall in Q2.

I am, however, impressed by international. Lululemon’s brand is clearly resonating globally, which can help to drive growth well into the 2020s. The men’s business didn’t measure up to the women’s business in Q2, but it has seen explosive growth in the recent past. A strong Q3 2020 could certainly be in the cards.

Long-Term Tailwinds for LULU

 The pandemic, you may have heard, has led to a work-at-home boom. While a lot of remote workers will return to the office post-pandemic, they are unlikely to do so at pre-pandemic rates. And if the average person works at home for, say, 2 days per week, that would be 2 more days per week that they can wear casual clothing.

Yes, I just made that number up, but the point is, Lululemon is going to benefit from the long-term shift to work-at-home in some capacity.

Plus, the office itself isn’t nearly as formal a place as it once was. I don’t think that yoga pants will ever be widely accepted in the workplace (I wouldn’t rule it out though). But LULU sells a lot of other types of apparel – more conservative types of apparel.

Casual wear in the workplace is getting more and more acceptable, and I expect that trend to continue post-pandemic.

Footwear is the Next Frontier

 Back in April 2019 – the same month LULU announced its five-year growth plan – CEO Calvin McDonald said that the company is planning to expand into the footwear category. McDonald pointed to “white space” in the shoe market, which basically means a place where an unmet need exists. It was a vague statement, and LULU still hasn’t taken the plunge more than a year-and-a-half later.

It’s not as if LULU has forgotten about footwear, however. On the Q2 call, McDonald talked about expanding into “footwear in the coming years.” Considering the company’s track record, I’m betting on LULU to succeed in the footwear category when the time comes. The rewards could be immense.

How Should You Play LULU Ahead of Earnings?

I’ve made it clear that I like Lululemon’s long-term outlook. I’m similarly optimistic about LULU’s outlook this week.

Q3 revenue is expected to be a shade over $1 billion, up 10% yoy. Earnings are projected to come in at 87 cents per share, down a little over 9% yoy. I think both numbers are too conservative, though the whisper numbers could certainly be a bit higher, particularly considering the stock’s recent performance.

I’m more confident, however, in LULU’s long-term outlook. I could see management coming out with strong guidance tomorrow, and that is the biggest reason why I’d advise getting in ahead of the tomorrow’s release.