Why Lululemon Stock Is a ‘Buy’ after Q2 Earnings

  • Lululemon stock continued to beat analysts’ expectations. The company posted stellar second-quarter results.
  • We expect Lululemon stock to benefit from strong sales and earnings growth in the coming quarters.
  • The stock’s high valuation seems warranted.

Lululemon Athletica (LULU) continued to impress with its quarterly performance. The company maintained its long streak of beating analysts’ estimates and posted strong sales and earnings growth. Notably, Lululemon had strong growth despite tough YoY (year-over-year) comparisons, which is impressive. The company increased its fiscal sales and earnings outlook for the second time, which could boost its stock.

We’re impressed with Lululemon’s stellar financial performance over the past several quarters. The company’s bottom line increased at more than a 30% rate in the past four consecutive quarters. The bottom line beat analysts’ estimates. Meanwhile, the company’s top line increased at more than a 20% rate in the past six consecutive quarters.

Lululemon is up against tough YoY competition in the coming quarters, which could impact its growth rate. However, we’re upbeat on Lululemon stock due to the company’s ability to drive meaningful sales and earnings growth. We think that product innovation, omnichannel offerings, and expansion into new markets could drive the company’s sales and profitability in the coming quarters.

Lululemon stock has risen about 55% YTD (year-to-date). The stock is trading at a high valuation multiple. However, the high valuation seems warranted considering the company’s strong sales and earnings growth rate.

Focusing on merchandise, store remodeling, and e-commerce initiatives will likely drive the company’s traffic. Lululemon is doubling its stores count in China. The company is also expanding its square footage in other regions, which will drive its top line. The margins will likely grow modestly due to sales leverage.

Lululemon’s second-quarter earnings 

Lululemon posted net revenues of $883.4 million in the second quarter, which beat analysts’ estimate of $845.7 million. The net revenues rose 22% YoY, which reflected total comparable sales growth of 15%. Meanwhile, comparable store sales increased 10% during the second quarter.

The company’s revenues rose 35% in Europe, while the APAC region delivered 33% growth. Within the APAC region, China stood out with stellar sales and market growth of 68%. In North America, the revenues increased 21% due to higher traffic.

The gross profit rose 23% to $485.8 million. Meanwhile, the gross margin expanded by 20 basis points to 55%. The higher gross margin drove the operating margin, which grew by 50 basis points to 19%.

Strong sales and margin expansion continued to support Lululemon’s bottom line, which marked astounding growth in the second quarter. The company posted an EPS of $0.96, which increased about 35% YoY and beat analysts’ estimate of $0.89. Share repurchases cushioned the company’s bottom line.

Analysts are upbeat on Lululemon stock

Lululemon’s stellar second-quarter performance led several analysts to raise their target price on the stock. Analysts made the following upward revisions:

  • Jefferies increased the target price to $200 from $175.
  • Credit Suisse has a target price of $235—up from $198.
  • RBC raised the target price to $215 from $200.
  • Cowen increased the target price to $214 from $200.
  • Susquehanna raised the target price to $222 from $210.
  • J.P. Morgan increased the target price to 230 from $200.

Notably, most of the analysts covering Lululemon stock maintain a favorable outlook. Among the 30 analysts, 18 recommend a “buy,” while 12 recommend a “hold.” Analysts’ consensus target price of $199.42 indicates an upside of 5.8% based on its closing price of $188.41 on Thursday.

Upbeat outlook to drive Lululemon stock

The strong first-half performance led Lululemon’s management to raise its fiscal sales and earnings outlook for the second time in a row. The company’s revenues are expected to be $3.80 billion–$3.84—up from the previous guidance of $3.73 billion–$3.77. Meanwhile, Lululemon expects its EPS to be $4.63–$4.70. Earlier, the company expected its EPS to be $4.51–$4.58 in fiscal 2019.

Lululemon stock is trading at 33.9x its fiscal 2020 estimated EPS of 5.56, which seems high. However, analysts expect the company’s sales and earnings to continue to grow at a double-digit rate in the foreseeable future, which warrants its high valuation.

Lululemon stock closed 4.3% higher on Thursday. Meanwhile, the stock was trading about 4% higher in after-hours trading following the company’s second-quarter results.

Market Realist analyst Amit Singh doesn’t own Lululemon shares.