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Buy Lululemon Stock Ahead of Q2 Earnings Despite Market Drop?

Published 09/03/2020, 06:51 AM
Updated 07/09/2023, 06:31 AM

Athleisure standout turned sportswear power Lululemon’s LULU shares were soaring until Thursday’s big pullback. The market-wide selloff, which hit high-flyers like Tesla (NASDAQ:TSLA) TSLA and Zoom ZM particularly hard, pushed LULU down 5% just a few days before the release of its second quarter financial results on Tuesday, September 8.

Wall Street Shrugs Off Pandemic Setbacks…

Lululemon, like countless other retailers deemed non-essential was forced to close many of its physical stores during the height of the pandemic. The firm has slowly returned to relatively normal operations since then. That said, it fell short of our Q1 estimates for the three-month period ended on May 3, with sales down 17% and its adjusted earnings down big.

Still, the stock surged after its June 11 release as Wall Street looked to the positives, such as a nearly 70% climb in online revenue. Lululemon was able to climb despite near-term setbacks that were out of its hands because investors are able to see the long-game, which the athleisure giant is ready to win.

Lululemon has forced everyone from Gap GPS to Target TGT to start their own athleisure brands. Along with its successful women’s offerings, LULU has pushed further into outwear to challenge Canada Goose GOOS and The North Face VFC.

Lululemon also sells far more work-appropriate clothing, self-care products, and more. Plus, executives expect to double the size of its menswear business by 2023. And LULU hopes to more than double its digital revenue and quadruple its international sales, which includes a big push in Asia.

The firm is also set to grow as the likes of Macy’s M and others slide due to changing shopping patterns, with a strong e-commerce business and standalone stores—less impacted by fading malls.

The firm then announced in late June that it is set to buy digital-focused at-home fitness company Mirror. This helps it enter a category that could be hot for a while that includes Peloton PTON and others.

Other Fundamentals

The Canadian company has helped change the way millions of people around the world dress, from the gym to the office. And its stock price has reflected that, with LULU shares up 475% in the last five years, to blow away rivals Nike (NYSE:NKE) NKE and Adidas (OTC:ADDYY) ADDYY. This includes a 110% run during the past 12 months and a 120% climb off the market’s March lows.

Lululemon stock slipped roughly 5% during regular trading Thursday to $378 per share after it hit new highs of nearly $400 on Wednesday. LULU is still firmly a growth stock, trading at 11.2X forward 12-month sales, against Nike’s 4.5X and its own one-year median of 6.8X.

However, if we consider its massive expansion, LULU looks far better than, for example, Zoom’s 60X or Shopify’s SHOP 41X—even though these aren’t Apples to Apples comparisons. Lululemon also has a solid balance sheet and it seems prepared to continue its expansion.

Our Zacks estimates call for LULU’s adjusted Q2 earnings to sink nearly 50% from the year-ago period to $0.51 per share, on 5.6% lower revenue. But both of these would represent solid improvements from the Q1’s 70% earnings drop and its 17% revenue decline.

Peeking ahead, Lululemon’s fiscal 2020 revenue is still projected to jump 3.4% to $4.12 billion, with its adjusted EPS figure only expected to slip 16%. This is then expected to be followed up by 52% EPS growth in FY21 on 24% higher sales.

Bottom Line

Lululemon is a Zacks Rank #3 (Hold) right now that has seen some positive bottom-line revisions activity recently. Yet even investors with a longer-term horizon likely want to wait and see what LULU and the broader market do after Thursday’s big drop, as a larger pullback might be underway after a historic run.

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NIKE, Inc. (NKE): Free Stock Analysis Report

Target Corporation (NYSE:TGT): Free Stock Analysis Report

V.F. Corporation (VFC): Free Stock Analysis Report

The Gap, Inc. (GPS): Free Stock Analysis Report

lululemon athletica inc. (LULU): Free Stock Analysis Report

Macys, Inc. (M): Free Stock Analysis Report

Tesla, Inc. (TSLA): Free Stock Analysis Report

Adidas AG (DE:ADSGN) (ADDYY): Free Stock Analysis Report

Shopify Inc. (NYSE:SHOP): Free Stock Analysis Report

Canada Goose Holdings Inc. (NYSE:GOOS): Free Stock Analysis Report

Zoom Video Communications, Inc. (NASDAQ:ZM): Free Stock Analysis Report

Peloton Interactive, Inc. (NASDAQ:PTON): Free Stock Analysis Report

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