It’s No Stretch: Lululemon Could Break Out of its Range

Key Points

• Lululemon Athletica Inc. rockets higher on solid results and guidance above consensus. 
• Brand loyalty and a push in DTC are supporting results. 
• The analysts are raising their targets and have the stock on track to break out of a range. 

The price action in Lululemon Athletica Inc. NASDAQ: LULU became muted for the last several quarters due to fears of slowing growth and underperformance that have yet to materialize. The latest results prove the company has loyal followers, is reaching new markets and can sustain high levels of growth. How long that growth can last is questionable, but the outlook is robust. 

The analysts are upgrading the stock and preparing for this market to break out. Breakouts are significant market signals because they can lead to increased momentum and sustained rallies that, in this case, could take the Lululemon stock price to a new all-time high. 

Another Quarter of Double-Digit Growth

Lululemon had a solid quarter with $2.8 billion in revenue, growing 30% compared to last year, the second fastest pace of growth in 2022 and a prior quarter acceleration above consensus. The revenue beat the Marketbeat.com consensus by 370 basis points on strength in all channels. 

The company reported a 27% system-wide comp, with store sales up 15% and DTC up 37%. Adding 32 new stores compounds the store comp, while DTC makes up 52% of the business. 

The margin news is mixed but overall favorable to investors. The company reported a decline in the GAAP and adjusted gross margin that were less than expected and bottom line results that left earnings up from last year and on track with the top-line growth — the adjusted $4.40 is up 29% compared to last year and beat by 320 basis points, and that's not the end of the good news. 

The company sees momentum in the business and is projecting in the first quarter and financial year 2023 results above the consensus estimates. Quarter one and financial year revenue and earnings ranges are above the consensus estimates at the low end and have the analysts raising their targets for results and the stock price. Morgan Stanley, which rates the stock "overweight" with a price target near consensus, has the stock listed as one of its top 30 stocks to own for the long term. 

Analysts Drive Lululemon Higher 

Given the analysts' sentiment, Lululemon shares are up nearly 15% in early trading and will likely move higher. At least 10 of the 28 covering the stock have issued new commentary, including two upgrades to "buy" from "neutral," one a double-upgrade to "outperform," and nine price target increases. Seven of the nine increases are above the consensus, which is above the top of the current trading range. Assuming this trend continues, Lululemon could break out of the trading range within weeks. 

The chart action is bullish. The market is up double digits on the results and outlook and on track to retest resistance at the $400 level. This is the critical level for the market and could cap gains if only briefly. A move above $400 would confirm the bulls are in control and allow for a move back to the all-time highs near $480 later in the year. If not, this stock could remain range-bound until later in the year when more results are released.