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Should You Worry About Lululemon Stock Ahead of Earnings?

Bret Kenwell

Shares of Lululemon Athletica (NASDAQ:LULU) will be in the spotlight after the close on Wednesday, as the company gears up to report its fourth-quarter earnings results. LULU stock has been surprisingly quiet over the last two months, tightly coiling between $140 and $150.

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The bulls are sure that Lululemon stock is gearing up for a big move higher, but should they be so confident?

While Under Armour (NYSE:UA, NYSE:UAA) stock rallied on earnings in February, the stock is now back below pre-earnings levels. Nike (NYSE:NKE) stock reported its quarterly results last week. While the company topped earnings and revenue expectations, guidance came up short.

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On Friday, Wedbush analysts downgraded Lululemon stock to neutral from outperform. They also slashed their price target from $176 to $155, implying less than 6% upside from current levels. Should these events have bulls nervous and bears giddy?

Evaluating LULU Stock

Just because an analyst went from bullish to neutral doesn’t meant the end is near for Lululemon. Further, just because UA has come down post-earnings and because Nike disappointed with its outlook doesn’t mean Lulu will do the same.

In December, LULU stock beat on earnings and revenue expectations, but because the market was in meltdown mode, investors sold down the stock. That was despite the company’s solid (although not robust) guidance. But then in January, Lululemon management bumped their guidance on the back of a strong holiday period.

LULU stock is still up about 13% from that announcement, and up about 8% from the levels just days before that announcement when shares unexpected gapped down.

As it stands, analysts expect Lululemon to earn $1.74 per share on $1.15 billion in sales for the quarter. That’s up around 31% and 24% year-over-year, respectively. I have no doubt that LULU can beat earnings and revenue estimates for an eighth straight quarter, particularly after the company essentially guided for these numbers just two months ago. However, it will all come down to guidance.

If it’s strong, look for Lululemon to take out its 2019 high and make a run at its 52-week highs near $165. If it’s below consensus expectations, a decline is in store.

Trading Lululemon Stock

chart of LULU stock


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So how can we trade the stock from here? Shares are dangling just below the 50-day moving average and are near the 20-day moving average. However, shares are holding over $140, as well as the 200-day moving average.

A favorable earnings reaction could propel the stock over $155. If shares take out this year’s high, look for a possible run at the fourth-quarter high. On a pullback, I want to see $130 hold. Below that and $113 is on the table, although I don’t expect the report to be bearish enough to warrant such a decline.

While the momentum-measuring MACD (green circle) is starting to turn up, it’s not enough of a bullish catalyst to solely drive LULU stock. Earnings will be the driver, and if the results are good, the MACD will be excellent fuel on the fire.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

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