Is Lululemon Stock a ‘Buy’ after the Pullback?

  • Lululemon stock has fallen nearly 5% since September 6.
  • The sustained momentum is sales and earnings could drive the stock higher.

Lululemon stock is on a downtrend

Lululemon Athletica (LULU) shares have fallen about 5% since September 6. Notably, Lululemon stock rose 8% on September 6 following stronger-than-expected second-quarter results. Since then, the stock has been on a downtrend. The recent decline in Lululemon stock could be an opportunity for investors to become constructive.

Lululemon stock has risen 58.7% on a YTD (year-to-date) basis as of Wednesday. Notably, the stock could rise more. The company has a strong history of beating analysts’ estimates. Also, the company has raised its fiscal guidance twice this year, which is encouraging.

We think that Lululemon stock could continue to benefit from sustained momentum in its core business due to product innovation, omnichannel offerings, and market expansion.

Lululemon’s focus on merchandising, store remodeling, and e-commerce initiatives bodes well for growth and could continue to drive traffic. We think that the company’s square footage expansion, mainly in China and other regions, could support its sales growth. The expansion in new categories, including the recently launched self-care, could support the company’s growth.

Sales leverage and a favorable mix shift could continue to support Lululemon’s margins and EPS. Meanwhile, share buybacks will likely cushion the company’s earnings.

Sustainable growth?

Lululemon’s EPS rose more than 30% in the last four quarters. The company’s revenues increased more than 20% during the same period. The high growth rate indicates that Lululemon is up against tough YoY (year-over-year) comparisons, which could limit its growth rate.

Despite tough comps, analysts expect Lululemon’s top line to mark strong double-digit growth in the second half of fiscal 2019. Moreover, the company’s top line will likely continue to grow at a double-digit rate in fiscal 2020.

Analysts expect Lululemon’s bottom line to continue to grow at a high double-digit rate. However, the company’s EPS growth rate could decelerate slightly.

Lululemon’s management expects its third-quarter sales to be $880 million–$890 million, which represents growth of 18%–19% YoY. The company expects its third-quarter comparable sales to increase in the low teens.

Analysts’ recommendations for Lululemon?

Analysts are upbeat about Lululemon stock. Among the 32 analysts covering the stock, 20 recommend a “buy,” while 12 recommend a “hold.” Analysts have a consensus target price of $211.07, which implies an upside of 9.4% based on the closing price of $193.02.

Piper Jaffray initiated coverage on Lululemon stock with an “overweight” rating and a target price of $227.