Lululemon Athletica (LULU) Offers Buying Opportunity

Shares of Lululemon Athletica NASDAQ: LULU were under pressure on Thursday despite reporting impressive Q3 earnings. After a decent 20% rally since early November, results were always going to have to be stellar to keep the momentum going and Wall Street felt they fell short of that. Both revenue and EPS beat analyst expectations but shares still found themselves down over 6% from Wednesday’s close at the worst point of Thursday’s session. They retraced the move and recovered somewhat into the close to finish the day down around 4%.

The stock of the athletic wear company is up nearly 90% from this time last year and investors shouldn’t be too worried about Thursday’s report or trading action. Alongside beating top-line expectations, management also raised forward guidance for the full fiscal year, signaling that the party isn’t about to end anytime soon.

Leading From the Front

The stock has been happily bucking the downward trend seen in most brick and mortar retailers of late and in the grand scheme of things a little profit-taking from all-time highs is healthy. Revenue is still up 23% year on year while comparable store sales are up 10% - quarterly numbers that more traditional retailers such as Macy’s NYSE: M, Kohl's NYSE: KSS and J C Penney NYSE: JCP would kill for.

These latest numbers and the stock’s performance year to date are all the more impressive when compared against these stocks and the retail sector as a whole. These department store names are down anywhere from 15%-50% while the S&P Retail ETF, XRT, is barely positive on the year. When compared to more athletic apparel specific names like Nike NYSE: NKE and Under Armor NYSE: UA, LULU is still the standout performer, outperforming each of those on the year by 50% and 75% respectively.

The fact that LULU’s Q1 and Q2 numbers also beat analyst expectations shows that there’s solid fundamental momentum at work here.

LULU’s CEO Calvin McDonald was unsurprisingly in a positive mode and commented with the release that "we're proud of the continued momentum in our business as we live into our vision to be an experiential brand. We are successfully executing on our Power of Three growth plan as we create authentic connections with new and existing guests around the world. I'd like to thank our amazing teams for achieving this strong level of performance."

Buying Opportunity?

Indeed, many on Wall Street might be viewing this pullback from highs as a decent buying opportunity. Towards the end of last month, things were getting a little hot and the stock’s RSI was above 80 which indicates overbought conditions (read more about the RSI here). The bulls and bears have been battling it out for control of the stock for the past two weeks but by a look on the chart, it’s clear who’s been in charge for the last year.

Having gone sideways from 2012 to 2017, the stock took off in January 2018 and has notched an almost 200% return since. With metrics like earnings, revenue and comparable same-store sales continuing to log double-digit percentage growth, it’s hard to bet against the stock with such energy behind it.

In the short term, we could see a pullback towards the $210 level as investors digest Thursday’s report and set expectations accordingly. There’s some support around $210 from when that level was resistance in September and October and it’s also around where the stock’s 50 day moving average is (we talked about using the benefits of using the moving average indicator last month here).

Setting a High Bar

Any investor considering getting involved must give consideration to the pressure on management and the company to continually beat expectations going forward. Yesterday, we saw a glimpse of what can happen even when they beat but not by enough. At 42x forward earnings, LULU has set itself a high bar to continue meeting - the retail industry average is 22x.

However all the signs point towards it being a well-oiled machine and for now, LULU’s management and shares are doing everything right.