Lululemon Stock Gears Up for a Massive Comeback Rally

Key Points

• Shares of Lululemon have been struggling all year and are back-trading at pre-pandemic prices.
• However, there’s a sense that the worst-case scenario is priced in, and shares are already starting to rally. 
• With only three weeks until its next earnings report, expect a strong rally before and after the report. 

For a stock that once rallied hand-in-hand with tech stocks, even though it’s essentially a fashion brand, Lululemon Athletica Inc’s NASDAQ: LULU current fall from grace must be a tough one for investors. Through the golden years of 2020 and 2021, shares of the Vancouver headquartered company sometimes outpaced even the likes of Alphabet Inc NASDAQ: GOOGL. However, while effectively all equities suffered during 2022 and most of 2023, Alphabet and many of its tech titan peers have gone on to rally back to all-time highs in the past year. 

It’s true that Lululemon's shares managed to ride the initial wave of optimism that swept equity markets last November, but they have been struggling hard since January. They’re down 50% for the year to date, far exceeding the 10% that shares of Macy’s Inc NYSE: M have lost—a rough comparison to take if ever there was one.

Athleisure Fatigue? Lululemon Expands Beyond Activewear

A couple of factors have conspired to send the once-vaunted stock down to a four-year low and to what is effectively its pre-pandemic price. Goldman Sachs summed up some of them earlier this month when they downgraded their rating on Lululemon to Neutral on the back of “recent execution challenges, lackluster innovation launches, and rising evidence of more regular promotionality.” There’s a sense that the whole athleisure fashion trend is starting to lose its allure to consumers, which helps explain why Lululemon’s clothing range has been branching out to include polo shirts, button-downs, and the like. 

The sentiment echoed Citi's note at the end of July, which also downgraded the stock from a Buy rating and wrote that “after three years of exceptionally strong growth in the active apparel market, the category has slowed meaningfully in F24, and we see no signs of that dynamic changing in H2.”

Lululemon’s Risk/Reward Profile: A Potential Comeback Opportunity

But there’s a strong argument to be made that after losing more than half their value in a little more than a year, the worst-case scenario is priced into Lululemon shares. There are several reasons to think we could be looking at the start of the mother of all comeback rallies.  

Let’s take the company’s fundamental performance first. Lululemon’s most recent earnings report was in June, and it smashed analyst expectations for both headline numbers. Revenue guidance for the current quarter was a little light, but guidance for the full year was consistent with forecasts. On the earnings front, it was actually better. Against a previous consensus of $14.14, Lululemon announced they were expecting diluted EPS to land between $14.27 and $14.47. 

The stock popped accordingly in the immediate aftermath of the release but has since lost another 30% of its value. It’s fair to say a lot of this was due to the broader market having some of its worst weeks in years, and on this basis, the risk/reward profile ahead of Lululemon’s next earnings report in early September is quite attractive.

Why Wall Street Is Turning Bullish on Lululemon

It looks like Wall Street is already starting to act on this basis, with the stock having already jumped nearly 15% in the past two weeks. Lululemon’s MACD reading, a popular technical indicator, also just had a bullish crossover last week, which suggests momentum has firmly swung to the bulls for now. 

There’s also the fact that at just $258, Lululemon shares are trading considerably lower than every single analyst price target made this year. Even the two recent updates from Goldman and Citi, which saw the stock being cut to a Neutral rating, included fresh price targets of $286 and $300, respectively. Robert W. Baird reiterated their Outperform rating at the end of July and gave Lululemon shares a price target of $350, while TD Cowen did the same, only with a refreshed price target of $420. 

That’s pointing to a targeted upside of potentially 60%, which only bolsters the argument that we’re looking at a seriously oversold stock that’s on the verge of kicking off an eye-watering recovery rally.