Should You Rush to Buy Lululemon Stock after Q1?

Lululemon stock fell in the pre-market session following its lower-than-expected first-quarter results. The decline in Lululemon’s (NASDAQ:LULU) revenues and EPS shouldn’t surprise investors. They knew that temporary store closures would take a toll on the company’s performance. However, what caught my attention was management’s positive comments about the recovery in sales and earnings.

Lululemon’s base business remains strong, which should drive its stock higher. Besides, any pullback in Lululemon stock could be an opportunity to go long.

Lululemon’s growth drivers

Lululemon posted first-quarter sales of $652 million, which declined about 17% YoY (year-over-year) and missed Wall Street’s expectation of $688.4 million. The company reported an EPS of $0.22 compared to an EPS of $0.74 in the first quarter of 2019. The EPS was below analysts’ estimate of $0.23.

While Lululemon’s first-quarter performance wasn’t impressive, improving business prospects should continue to drive its stock higher. Management expects the company’s second-quarter sales to stay low. However, the rate of decline in Lululemon’s top line could decelerate significantly, which is encouraging. Also, management expects to report positive revenue growth in the fourth quarter.

Similar to sales, Lululemon’s bottom line could show sequential improvement in the next few quarters. Meanwhile, the earnings could mark YoY growth in the fourth quarter.

Lululemon has reopened about 300 of its stores. The company saw improving trends in these stores. In China, store sales have been increasing at a double-digit rate. Meanwhile, North American stores are also showing healthy trends. While stores will improve gradually, the digital business has been performing exceptionally well. The company expects its digital sales to remain strong in the short term, which will continue to support its top line.

Lululemon continues to invest in digital and omnichannel initiatives. The company expanded its fulfillment capabilities, which bodes well for future growth. Meanwhile, strong brand affinity and a lower customer base should help support the margins through price restructuring in the long run.

Analysts raised the target price

Multiple analysts raised their target price on Lululemon stock after its first-quarter results. Analysts made the following upward revisions in their target prices:

  • J.P. Morgan increased the target price to $334 from $283.
  • Jefferies raised its target price to $290 from 194.
  • Credit Suisse increased the target price to $315 from $215.
  • Piper Sandler raised its target price to $365 from $360.
  • Riley FBR increased its target price to $317 from $290.
  • Susquehanna has a target price of $360—up from $240.
  • Needham raised its target price to $345 from $225.

While several analysts increased their target price on Lululemon stock, RBC cut its target price to $348 from $360.

Most of the analysts covering Lululemon maintained a favorable outlook on the stock.