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Should Investors Go Long on Lululemon Stock?

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Shares of Lululemon (LULU) were down about 3.4% as of December 16 after it posted its third-quarter earnings results on December 11. Notably, Lululemon stock fell despite the company comfortably beating Wall Street’s expectations on both the revenue and earnings fronts.

What irked investors was the company’s fourth-quarter guidance. Investors expected Lululemon’s guidance to be higher than analysts’ consensus estimate. However, that didn’t happen. For instance, the company expects its adjusted EPS to be $2.10–$2.13 in the fourth quarter. Wall Street’s consensus estimate was $2.13.

Meanwhile, Lululemon expects revenue of $1.315 billion–$1.330 billion. Analysts’ estimate is $1.33 billion.

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Growth catalysts

While Lululemon’s fourth-quarter guidance failed to enthuse the market, we see several growth drivers that could continue to support the upside in its stock. We continue to believe that Lululemon is one of the best companies in the athletic apparel segment.

Consistent demand in the athleisure market and Lululemon’s ability to charge premium pricing from its patrons could continue to drive robust sales and earnings growth. Besides, we see its direct-to-consumer business as one of the primary catalysts for driving both its revenue and its margins. During the last quarter, its direct-to-consumer net revenue increased by 29%.

Lululemon’s digital transformation, geographical expansion, innovation, and premium pricing are likely to help the company outgrow its peers in the coming quarters.

Lululemon is set to double its store base in China. Its sales continue to grow at a solid pace in the country, with its e-commerce sales growing at a robust pace. During the last quarter, Lululemon’s e-commerce sales rose by 60% in China. The company’s men’s category is also seeing stellar demand and growing at a healthy pace.

Besides higher sales, we expect Lululemon to continue to benefit from lower product costs, which is likely to boost its margins.

Overall, higher sales and margin expansion could continue to drive its EPS and, in turn, its stock price.

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LULU once again raised its full-year guidance, which is encouraging. Lululemon expects its full-year revenue to be $3.895 billion–$3.910 billion, up from its previous guidance of $3.800 billion–$3.840 billion. Further, it expects its EPS to be $4.75–$4.78 compared to its previous outlook of $4.63–$4.70.

Lululemon stock: Stellar financials support upside

Lululemon stock has generated stellar returns so far this year. It’s up about 85.3% YTD (year-to-date) as of December 16. In comparison, Nike (NKE) and Under Armour (UAA) are up 33.3% and 15.6%, respectively, YTD.

Lululemon’s robust financial performance in the last several quarters has driven its stock up. Its revenues have beaten Wall Street’s consensus estimates for the past several quarters. Moreover, its revenues have grown at a double-digit rate for the last ten quarters. Lululemon’s top line marked more than 20% growth in the previous seven straight quarters. Also, its top line increased by 24% in 2018.

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Exceptional sales growth and margin expansion drove its bottom line higher. Lululemon’s EPS have grown at a breakneck pace in the past several quarters. Its bottom line jumped about 28% in the last reported quarter. Moreover, Lululemon’s EPS rose by more than 30% in the seven quarters leading up to its most recently reported quarter.

Analysts raise their price targets on Lululemon stock

Several analysts have raised their price targets on Lululemon stock, which is positive. They’ve made the following upward revisions to their price targets:

  • Susquehanna has increased its price target to $260 from $222.
  • Piper Jaffray has raised its price target to $245 from $244.
  • Credit Suisse now has a price target of $250 on LULU, up from $235.
  • Riley FBR has increased its price target to $218 from $182.
  • MKM Partners has raised its price target to $258 from $255.
  • Citigroup has increased its price target to $230 from $205.
  • Guggenheim now has a price target of $250 on LULU, up from $220.
  • Telsey Advisory Group has raised its price target to $260 from $240.
  • Bernstein has raised its price target to $202.
  • A. Davidson has increased its price target to $220 from $185.

Analysts have a consensus price target of $241.79 on Lululemon stock. This target indicates a potential upside of 7.3% based on its closing price of $225.35 on December 16. The majority of analysts suggest “buys” on LULU.

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