The rhetoric in the media this week has been bearish even when markets rallied on Tuesday. So there is trepidation on Wall Street and traders have one foot out the exit door. But there are a few exceptions and Lululemon (NASDAQ:LULU) is one that continues to shine. LULU stock is headed higher, even from here.
Last night, management reported earnings and investors loved what they saw. LULU stock is up 12% on the headline as they delivered an excellent report card. Moreover, the stock came into earnings day already up 20% year-to-date. This was already ahead of the S&P 500 and the SPDR S&P Retail ETF (NYSEARCA:XRT) by 9%.
So, did they beat expectations? The answer is an emphatic YES! They clobbered both the sales and earnings expectations. Long gone are the days of the see-through pant debacle.
What makes this more impressive is that they had already raised the range for the quarter. Not only did they crush the sales estimates with 16% comparable sales, but they increased their bottom line 87% from last year. LULU Chief Executive Officer said that the company had its best year ever behind system-wide strength in their business.
What makes this more impressive is that even as LULU stock is almost at its all-time highs they committed to a $500 million buyback program. This confidence from the management team eliminates all doubts that they can continue to perform this well.
LULU has figured out the right mix of product lines. They are growing new areas like shoes and men’s lines. This way they can leverage their sales infrastructure to flow stronger margins to the bottom line. To that point, margins are already strong, especially in e-commerce and they rarely discount.
Fundamentally they steered away from the athleisure pin. For the longest time investors deemed it a fad. But lately it morphed into a way of life-wear and it definitely stepped out of the yoga studios.
Lululemon stock is not cheap. It sells at a price-to-earnings ratio of 44, which is expensive in absolute terms say relative to Apple (NASDAQ:AAPL) which sells at a P/E of 18. But it’s in line with retailers like Costco (NASDAQ:COST) or Walmart (NYSE:WMT).
For as long as LULU continues to deliver on growth as they have been doing, I will give them a pass on valuation. I’d rather pay 44 times for LULU than risk the same P/E on Walmart (NYSE:WMT) or Costco (NASDAQ:COST). LULU is clearly executing on plans almost flawlessly and it is not shackled like these two traditional brick and mortar chains.
How to Approach LULU Stock
LULU still has a clear road to exponential expansion. CEO Calvin McDonald also confirmed that they had strength in the Chinese markets. So the growth there is exploding and it’s just getting started. This leaves little room to fade the rally. Shorting LULU stock here is the equivalent of shorting equity markets in general. Strength in Asia more than offset whatever weakness comes from Europe.
This is a stock that is defying gravity and in the face of tremendous unease on Wall Street. After all, we are still facing headwinds from geopolitical headline risk from Brexit and the global tariff wars. So as LULU stock approaches its all-time highs it becomes crucial that it slices right through it.
Those already long LULU can stay in it and set trailing stops based on portfolio balance and preferences. But for those looking to buy the stock, this is not an obvious entry point. However, LULU is a momentum stock so it won’t give us a clear signal to enter. It’s going to be a case of buy high and sell higher.
Nevertheless, it won’t be a bad idea to see the bulls actually close above the all-time high before chasing it. In short, if the markets are higher this year, then so is Lululemon stock.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
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