What To Do With Lululemon (NASDAQ: LULU)

The well-known athleisure brand Lululemon (NASDAQ: LULU) will be releasing its Q1 earnings after the bell rings to end today’s session. They’ve had a tough first half to the year, with shares down close to 50% from last November’s all-time high, so investors will be hoping this report can help turn things around. 

To be fair, it’s starting to look like shares might have put in a bottom already last month, in what was a dip back to their pre-pandemic level for the first time. Let’s not forget, Lululemon was among the best-performing stocks of the whole pandemic, and even outperformed many tech names. From the lows of March 2020 through last November, shares rallied 275%. The retracement seen in the stock since then will have been a tough pill to swallow for many.  

But there are more than a few reasons to think that a strong summer might be on the cards for the beaten down stock from Vancouver. Let’s take a look at some of them. 

Bullish Comments

For starters, we’ve seen several of Wall Street’s heavyweights join the bull’s camp in recent months, even as shares dipped lower. In April, Bank of America strategist Anthony Cassamassino released a list of ten investment ideas for Q2, which included Lululemon. He felt the company’s prospects were improved by its most earnings results, and pointed to the company's accelerating growth rate. The team also said the latest financial figures "should eradicate the view that this was simply a pandemic beneficiary."

A few weeks after that, BTIG tossed their hat in the ring as they reiterated their Buy rating on Lululemon with a price target of $491. To be fair, at the time their shares had been rallying hard from March’s low and were up almost 50%. The fact that they’re back under $300 right now makes BTIG’s stance and suggested 60% upside all the more compelling. They’d been impressed when the company laid out its financial targets and its Power of Three strategy at a late April investor event, with analyst Camilo Lyon noting that "these targets are impressive by any measure, particularly given that the company is planning to double its business again vs. three years ago but on a much larger sales base. What's more, we believe that these targets could prove conservative over time.”

Truist Securities then boosted their rating on Lululemon after the same event with their $490 price target echoing BTIG’s stance. But then came May, and a fresh bout of selling took shares down to the lows they’re only just starting to consolidate around now. However, if you’ve been on the sidelines the whole time, this might be the perfect buying opportunity. 

Morgan Stanley were out last week with an upgrade to Lululemon, moving them to an Overweight rating from Neutral in advance of this evening’s earnings release. They called it a “compelling opportunity to buy a compounding retail growth story at a discounted valuation” compared to historic levels. Analyst Kimberly Greenberger said the firm has long been structurally bullish on the business and has been looking for valuation pullbacks as potential opportunities to become more constructive. With shares down more than 40% this year so far, the current level is seen as “an attractive entry point for long-term-oriented investors”.

Getting Involved

There’s always a heightened risk of buying into a stock right before, or just after, their earnings come out, but at the very least all these bullish comments should give investors pause for thought. Lululemon’s stock is essentially back trading at pre-pandemic levels, while they’re still turning a healthy profit and driving quarterly revenue by, an expected, 26% year on year. 

As Greenberger noted, "Lululemon is a long term topline grower, supported by compelling secular tailwinds (e.g., performance/athleisure focus), a market share gain opportunity, & credible future revenue drivers (e.g., international expansion, digital growth, & product innovation/expansion into new categories). They also have a best-in-class EBIT margin, supported by high average selling prices, with room for modest expansion long term.”

With the broader equity markets starting to rally from the depths of last month’s sell-off, Lululemon could well be one of the better quality stocks out there that’s still trading at a significant discount to fair value.