Lululemon (LULU) Down On Earnings, Is Now The Time To Buy?

The Comps Don’t Reflect Business Trends

To say that Lululemon (LULU) has been one of the better-performing stocks post-pandemic is an understatement. The shares recovered 100% of their correction by mid-Month in May and have since extended the rally another 25%. Now, trading near its very-recently set all-time high the stock is beginning to pull back. That, along with Thursday’s earnings report, is offering another entry into this high-quality growth story.

Something investors need to understand about these results is they span virtually the entire shut-down. The quarter ended May 3rd, just after the deepest impact of the economic closure and right before the reopening began. What this means is business has only been improving since the beginning of the 2nd quarter and gaining momentum. Prior to May 3rd, virtually all of the company’s 489 stores were closed. Since then, Lululemon has reopened 295 of its company-owned stores and more are opening every day.

Lululemon Misses Consensus, Oh No!

Lululemon grabbed the market’s attention when it reported a top and bottom-line miss for the first quarter. The company’s revenue fell -16.7% due to the COVID-19 pandemic falling short of consensus by 670 basis points. GAAP EPS came in at $0.22 and also below consensus. The reason is eCommerce. eCommerce, although growing by 68% YOY, was expected to offset more of the weakness caused by store closures. Oh well.

One reason for the EPS miss is a de-leveraging of revenue from company-owned stores. The combination of decreased revenue and fixed occupancy costs resulted in a near 4.5% contraction in gross margin. The EPS would have been worse, however, if not for management’s nimble actions in preparation for the crisis. By capitalizing on supply-chain flexibility they were able to cut product margins by 1.80%.

The balance sheet is still in good shape which is what really matters, coming out of the COVID-crisis like we are. Operating capital was cut to only $32.8 million in the quarter but that is a one-off event with store reopenings already underway. The company also made several moves to preserve its capital that include cutting CAPEX plans for the year. Cash and equivalents were $832 million with another $325 in available credit, and inventory is flush, so the company appears well-positioned for the rebound.

The Analysts Still Like Lululemon

Wedbush was the first sell-side analyst to comment on Lulu’s results and what it had to say is reflective of the analyst’s community in general. While bullish on the long-term outlook, the near-term outlook among the analysts is less robust. The recent run to new highs has the stock trading at a high multiple and in need of correction.

"All in, we continue to see lululemon coming out of the coronavirus environment positioned better than most owing to strong demand trends, customer loyalty, advanced data analytics and execution, diversification in the supply chain, and a strong balance sheet culminating in a meaningful edge for the foreseeable future, although that is) likely priced in (with the stock) trading at a 36% premium to its 5-year historical P/E …”  says analyst Jen Redding of Wedbush.

The Technical Outlook: Correction, Lower Prices Ahead

The technical outlook for Lululemon is a little bearish right now. Not really bearish as in the stock is about to shed 10% or 20%, but bearish enough it might pull back to a firmer support level before moving higher. Today’s action has the stock down another 3.0% in early trading, below the $300 level, so a deeper pullback is at least possible if not probable.

If support does not step in at this level, the short-term moving average is the next most-likely target. Investors looking to get into this stock should wait for signs of buying support before entering at either level because it looks like lower prices are in the cards. Longer-term, the outlook for Lululemon is very bullish so pull-backs in this stock should be viewed as buying opportunities.