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Why Lululemon (LULU) Stock Looks Like a Buy Heading into Q4 Earnings

Benjamin Rains

Lululemon LULU shares popped over 3% Thursday heading into the release of its fourth quarter financial results, as part of its larger 2019 climb. The yoga apparel and athleisure giant’s bottom-line looks set to surge as it expands its menswear business, its global reach, and more.

Recent News

Barclays analysts earlier this week elaborated on why they are high on Lululemon as it tries to grab market share from Nike NKE, Adidas ADDYY, and Under Armour UAA—which has struggled to roll out compelling athleisure offerings. The firm currently has an “overweight” rating on Lululemon stock and a $200 a share price target, which represents roughly 39% upside compared to LULU’s $144.35 a share closing price on Wednesday. Analyst Matthew McClintock said that Canadian company “has a significantly larger [total addressable market] than even the most optimistic estimates likely expect.”

“We continue to believe Lululemon’s [total addressable market] is ever-expanding as the company has entered into men’s in a meaningful way, has seen success in office, travel [and] commute offerings and continues to see a significant amount of opportunity in bras and outerwear.”

 

 

Company Overview

As the Barclays analyst mentioned, the firm has expanded far beyond its original women’s yoga apparel in recent years. Lululemon currently sells men’s and women’s jackets for as much as $600 as it tries to compete against Canada Goose GOOS, V.F. Corporation’s VFC The North Face, Columbia Sportswear COLM and other higher-end brands.

Lululemon now boasts a lineup of outwear, shoes, accessories, as well as more work-appropriate and fashion-focused offerings for both men and women—which will likely become a key growth area for LULU as companies around the country relax their dress codes. Earlier this month, Lululemon also signed NFL quarterback Nick Foles as its first men’s ambassador in an effort to attract consumers away from more traditional sportswear brands.

Lululemon’s success has also seen Gap GPS push more heavily into athleisure, which includes the launch of a new men’s brand. Meanwhile, newer companies such as Austin, Texas’ Outdoor Voices have expanded their retail footprints into major hubs around the U.S.

Lululemon is testing out a new loyalty program as retailers from Nordstrom JWN to Target TGT try to navigate the modern retail environment. The company is also ready to jump into the self-care market as the likes of Walgreens WBA partner with trendy, subscription-based services in order to boost sales and attract new customers. Plus, Lululemon has expanded its presence in key Asian regions.

The company closed Q3 with 426 stores around the world. Investors should also note that LULU’s e-commerce comps surged 46%. Going forward, the company’s ability to expand its digital commerce business will likely become even more important in the Amazon AMZN-crazed retail age. This expansion includes the firm’s presence across social media outlets, such as Instagram FB, where brands are now built from scratch and consumers shop directly.

 

 

Outlook & Earnings Trends

As we alluded to at the top, shares of Lululemon have jumped over 22% this year to outpace the S&P 500’s 13% climb, its industry’s 18% average, and Nike. LULU stock rested up 3.10% through mid-afternoon trading Thursday at $148.82 a share. This marked a roughly 10% downturn from its 52-week high of $164.79 a share, which gives the stock some room to run.

Before we look at what to expect from LULU’s Q4 financial results, it is worth noting that company management raised its quarterly guidance earlier this year on the back of strong holiday period sales. The Vancouver, Canada-based firm upped its guidance based on total comparable sales growth in the mid-to-high teens, up from high-single to low-double digits comps expansion.

With that said, Lululemon’s Q4 revenues are projected to jump 23.7% to reach $1.15 billion, based on our current Zacks Consensus Estimate. This would top Q3’s 21% top-line growth. Meanwhile, the firm’s full-year revenues are projected to surge roughly 26% from fiscal 2017’s $2.65 billion to reach $3.27 billion. Last year, total full-year revenue popped just 13%.

Moving on, Lululemon is projected to see its adjusted Q4 earnings soar 30.8% to touch $1.74 a share. Plus, the athletic apparel company’s full-year EPS figure is expected to surge 44.4% to reach $3.74 a share. We should also note that LULU has seen some positive earnings estimate revision activity recently.

 

 

Bottom Line

Lululemon is currently a Zacks Rank #2 (Buy) based, in part, on its recent earnings estimate revision activity. The company also boasts an “A” grade for Growth in our Style Scores system. And Lululemon executives have reaffirmed its goal to reach $4 billion in revenue by 2020, which includes hitting $1 billion in menswear sales.

LULU is scheduled to release its Q4 and full-year 2018 financial after the closing bell on Wednesday, March 27.

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