The Rebound In Lululemon Athletica Is On
After falling more than 31% from the all-time high set in late 2021 shares of Lululemon Athletica (NASDAQ:LULU) are ready to rebound. The market caved in the wake of the updated Q4 guidance and may move lower, but we don’t think so.
The market caved but on the charts, it looks like capitulation and capitulation is an opportunity for investors looking to ride the next rally. Based on the news that is already coming out, the analyst outlook, and the institutional activity, we think the next rally is ready to begin.
Lululemon Guides The Market Lower
Lululmeon issued updated guidance just a month after smashing through the Marketbeat.com analysts consensus for Q3 results. The company says Omicron is cutting into its already strained labor force and supply chain and may adversely impact the Q4 results. The new guidance is for revenue and earnings to come in at the low end of the previously stated ranges which compares negatively to the current consensus estimates. The upshot is that demand remains strong so sales will likely shift to digital channels, at least in part.
According to Lululemon CEO Calvin McDonald:
“We are closing out a strong 2021 in the coming weeks, and we’re pleased with how lululemon has delivered over the course of the year. We started the holiday season in a strong position but have since experienced several consequences of the Omicron variant, including increased capacity constraints, more limited staff availability, and reduced operating hours in certain locations…”
The risk in the guidance is to the upside. While there is a negative impact from Omicron, the effects are already subsiding in some markets and there are signs store traffic is already on the upswing.
Analyst Camillo Lyon at BTIG says "while Omicron dealt a blow to LULU's store performance at the worst possible time (two very high volume weeks before Christmas) just as the window for e-commerce shipments to arrive in time for the holiday was closing, the good news is traffic has already started rebounding as the worst of Omicron infections appears to have peaked.” Mr. Lyon also noted the company’s digital success when he maintained a buy rating and lowered his price target by $1 to $489.
Lululemon Athletica Is The Most Downgraded Stock In First Two Weeks Of 2022
Lululemon, because of its guidance update, is the most downgraded stock in the first two weeks of the new year. The company received 12 negative price target adjustments, but take that with a grain of salt. There were 12 downward price adjustments but the new consensus is still projecting 28% of upside for the stock and the high price target adds another 18% on top of that. The sentiment is souring, slightly, but the analyst community is still overwhelmingly bullish on the stock and rate it a firm Buy.
Turning to the charts, the new guidance sparked a downward movement in price action that looks like capitulation to us. Capitulation is when the bulls give up and the bears exhaust their last hurrah.
In this case, price action gapped down to a key support level where it immediately reversed course. Now, the price action is drifting higher and the indicators support further upside. Both MACD and stochastic are divergent from the new lows and stochastic is showing a bullish crossover.
Price action may not begin rallying higher immediately, but we expect to see a significant improvement by the time the company reports earnings again in late March. That’s when the rally will most likely start.
