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Previewing LULU Earnings with the Stock Down 40%

·4 min read

Inflation has certainly had an ill effect on the retail sector, with reported earnings in the sector currently down 20% from Q2 earnings a year ago. As we round out the second quarter earnings season, one stock investors and analysts will be looking towards is Lululemon (LULU)

The yoga-inspired athletic apparel company has become a darling for investors over the last few years. Lululemon has in a sense become a conglomerate in designing, manufacturing, and distributing athletic apparel for women, men, and female youth.

Trading 38% off its highs, it will be important to see how the demand specifically for premium athletic clothing affected Lululemon during the second quarter. This will give more insight into the effect inflation is having on Lululemon’s customer base.

 

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

One indicator of current and future demand that will offer broader guidance are store traffic numbers.

Lululemon’s store traffic from Q2 2021 was up 150% from the year prior. Traffic increased 40% during the first quarter 2022 for both stores and e-commerce sites and apps. Any modest increase similar to these numbers will surely be applauded by investors. While investors won’t necessarily be expecting this type of monstrous growth in Q2 2022, any decrease will be monitored.

Performance

Lululemon is down 23% year to date, with much of the decline coming between April and May, as shown in the chart below. Investors began to sour on the performance of retailers during the first quarter. This caused LULU to fall 18% in May alone and has led the stock to underperform the S&P 500. 

LULU is also down nearly 40% from its November peaks. Even with that drop, Lululemon shares are up around 388% in the past five years to crush the benchmark and its industry.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

 

Lululemon’s stock has the tendency to spike when it beats earnings expectations. Most recently, LULU posted a first quarter earnings surprise of 3.5% at $1.48 per share. The stock was popped 4% after the Q1 earnings beat.

We can see this same trend after LULU beat fourth quarter earnings estimates, with the stock spiking 2% immediately after it exceeded expectations. LULU had a prolonged rally after the Q4 earnings beat, before cooling off in May when investors became cautious of retail earnings in the midst of inflation.   

Lululemon has posted earnings surprises in the last eight quarters, going back to September of 2020. This has led to LULU becoming an investor favorite, and why there is much anticipation leading up to second quarter earnings.  

Outlook

The Zacks consensus estimate for LULU’s Q2 earnings is $1.85 per share, which would represent a 12% increase from Q2 2021. Sales for Q2 are also expected to be up 22% at $1.77 billion.

Year over year, LULU is projected to post 21% annual earnings growth in 2022, with its FY23 earnings set to grow another 17%. Solid top line growth is also expected, with FY22 sales projected to climb 23% and 14% in FY23 to $8.80 billion.

Valuation

Currently trading around $300 a share, LULU has a forward P/E of 32X. This is much lower than its high over the last five years of 94X and close to the median of 40X. 

Lululemon’s P/E is much higher than its industry average of 10.65X, but Wall Street is willing to pay a premium for the stock because of its growth outlook, with EPS growth of 20% expected over the next five years.

Lululemon’s Textile-Apparel Industry is in the bottom 6% out of 252 Zacks Industries, but LULU’s growth and outlook has been stellar.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Bottom Line

The anticipation heading into Lululemon’s second quarter earnings is running high amid growing inflation concerns. LULU’s stock has started to create quite the track record of beating earnings expectations. Wall Street wants to see if this can continue in the midst of inflation.

LULU currently has a Zacks Rank #3 (Hold). It will be important to see the guidance Lululemon offers as Wall Street worries about inflation and slowing consumer spending. And history shows that if LULU beats earnings estimates the stock could climb.


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