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Can Lululemon’s Q1 Earnings Boost Its Stock Price?

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Amid the weakness in the broader equity markets and temporary store closures, Lululemon Athletica (NASDAQ:LULU) declined to a low of $128.85 on March 18. Since then, the stock has made a significant recovery by rising 145.6% as of Tuesday. Although Lululemon closed its stores, its e-commerce business was still operational. Also, the company announced that it would open 350 stores globally by the end of May. The company’s stock price rose due to the expectation of growth in e-commerce sales, strong fourth-quarter sales, and investors’ excitement about reopening stores. Meanwhile, Lululemon will likely report its first-quarter earnings after the market closes on Thursday.

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Analysts’ expectations from Lululemon

For the first quarter, analysts expect Lululemon to report revenue of $683.2 million. The amount represents a fall of 12.7% from $782.3 million in the first quarter of 2019. Store closures could drag the company’s revenue down. However, the growth in e-commerce sales could offset some of the declines. In the fourth quarter, Lululemon’s e-commerce sales grew 39% to form 33% of the company’s total sales. I think that the share of e-commerce sales could rise more due to growth in online sales and store closures. Meanwhile, the company plans to develop innovative products, enhance guests’ experience through investing in digital advancements, and expand its presence to drive its sales.

Amid the COVID-19 outbreak, analysts expect Lululemon’s bottom line to fall over 50%. They expect the company to report an adjusted EPS of $0.23 in the first quarter. The amount represents a fall of 69.2% from $0.74 in the first quarter of 2019. The sale deleverages from negative SSSG and employee support initiatives could be a drag on the company’s margins. The share repurchases in the trailing four quarters could offset some of the declines.

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Analysts’ recommendations for Lululemon

Wall Street is bullish on Lululemon. Since the beginning of this month, Cowen, Wells Fargo, Bank of America, Oppenheimer, MKM Partners, Deutsche Bank, Wedbush, Piper Sandler, and RBC have all increased their target prices. However, Wells Fargo downgraded the stock from “overweight” to “equal weight.” To learn more, read Wells Fargo Downgraded Lululemon, Most Analysts Are Bullish.

Overall, analysts favor a “buy” rating for the stock. Among the 34 analysts, 64.7% recommend a “buy,” while 35.3% recommend a “hold.” None of the analysts recommend a “sell.” As of Tuesday, analysts’ consensus target price was $277.10. The target price represents a fall of 12.4% from the current stock price.

YTD stock performance

The recent surge in Lululemon’s stock price pushed its returns for this year into positive territory. YTD, the company has returned 36.6% as of Tuesday. Lululemon has outperformed the broader equity markets and its peers. During the same period, the S&P 500 Index has fallen by 0.7%. Nike (NYSE:NKE), Under Armour (NYSE:UAA), and Columbia Sportswear (NASDAQ:COLM) have returned 1.3%, 49.4%, and 15.3%, respectively.

Overall, I’m bullish on Lululemon despite the surge in its stock price. The company’s long-term debt is zero. By the end of the fourth quarter, the company had $1.1 billion in cash. Lululemon had a $400 million revolving credit facility. So, given the growth prospects and strong balance sheet, I think that investors should buy the stock before its earnings.

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