Lululemon (NASDAQ: LULU) Gets Some Much Needed Upgrades

Despite being an athletic apparel company and very much not a Silicon Valley tech stock, Lululemon (NASDAQ: LULU) has certainly been acting like one for much of 2020. From March through August, shares rallied close to 200%, matching the likes of Apple’s (NASDAQ: AAPL) and Advanced Micro Devices’ (NASDAQ: AMD) performance. And like those and their tech peers, Lulu shares have cooled considerably with the onset of fall.

The catalyst for the drop at the start of September was a downgrade from Citi, who moved shares to Neutral from Buy. At the time, Citi analyst Paul Lejuez clarified he still liked the stock’s long-term prospects but said “we have to ask ourselves if we can realistically recommend buying LULU at $400 with a call it can go to at least $460 over the next 12 months”.

The check to Lulu’s momentum was compounded a week later when their Q2 earnings didn’t quite wow investors like they needed too. As we’ve seen time and time again, Wall Street is only too happy to buy into a hype story if the numbers justify it. Unfortunately for Lululemon they didn’t, and shares found themselves off the highs by about 25% by the end of September and have traded largely sideways since then. Many on Wall Street might have been starting to think the bubble was bursting.

The Bulls Defend

Despite this, however, the stock still has a fair share of sell-side bulls in its corner and they haven’t been quiet. On the last day of September Bank of America came out with a Buy rating and a $390 price target; right around where shares had topped out in August. In a note to clients, analyst Lorraine Hutchinson said “we view Lululemon as one of the best growth stories in retail and expect the brand to be a winner in a COVID and post-COVID environment. A margin accretive ecommerce business, an outsized international expansion opportunity and the development of categories that will significantly increase its addressable market are factors that should drive consistent earnings growth.”

This sentiment was echoed by Deutsche Bank on Wednesday of this week when they moved shares of Lulu from a Hold to a Buy rating. They’re big fans of the margin recovery story and think this is where most of Lululemon’s near term upside will come from.

That being said, they still called out the valuation as being far from cheap but added "we believe LULU is positioned to once again outperform the retail sector benefiting from likely being a top consumer destination for Holiday shopping, having a strong margin recovery story over the upcoming quarters, and uniquely having bottom-line support from the balance sheet."

Bright Days Ahead

Any investors who were starting to question their positions after the 25% dip will be reassured by this bullish tone and will draw further confidence from the fact that the stock made it onto JPMorgan’s Analyst Focus list earlier this week. The company’s e-commerce engine is ticking over nicely and looks set to continue being the core revenue engine that so many other brick and mortar focused retail names are lacking.

To be sure, the stock still has a price-to-earnings ratio of 80 and doesn’t offer a dividend - two factors which add to the argument of it being more tech than retail. But while this might be the time of the year when we dress up in costumes and wear masks, it’s safe to say that Lululemon isn’t masquerading as Silicon Valley wannabe.

They’ve just managed to catch the e-commerce wave that has swept the economy this year and while shares are definitely reflecting that, the company looks set to continue doing the same into 2021 and so should the shares.