Are Lululemon and LULU Stock Back on Top?

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Lululemon Athletica (NASDAQ:LULU) pulled off the rare feat of beating analysts’ revenue estimates in the most recent quarter, helped by new fashions that appealed to the large portion of its customers who don’t actually wear LULU to the yoga studio or gym.

Lululemon logo LULUAnd in one of the market’s favorite moves, LULU earnings likewise beat Wall Street estimates, and the company raised its profit outlook. Cue rally.

For a long time, LULU’s issue was that, as much as basic styles work for people who wear LULU while exercising, they’re not so successful as everyday attire. At the same time, LULU had come under increasing pressure from competitors charging lower prices for activewear.

LULU responded with a selection of fashions that did well with shoppers even though same-store sales — a critical measure of a retailer’s health — declined.

The better-than-expected Lululemon earnings goosed LULU stock and might just be the catalyst that launches LULU on a path toward new all-time highs. That is, if the even pricier valuation doesn’t catch up to it first.

LULU stock is up 20% for the year-to-date to beat the S&P 500 by a very healthy 19 percentage points. There’s no doubt LULU has been a great holding in an otherwise nothing year for the broader market.

But LULU stock still has a ways to go before it reclaims all the ground lost to the yoga pants debacle of 2013. Even after rising nearly 50% over the last 52 weeks, LULU is still shy of a record high from two years ago, when it had to recall yoga pants that were too sheer. The scandal went on to spark a year-long selloff.

Whether LULU can maintain this trajectory to recover losses stemming from the scandal remains to be seen, but the Lululemon earnings results certainly fuel the bull case.

LULU Beats the Street Once Again

For the most recent quarter, LULU had a profit of $47.8 million, or 34 cents per share, up from $19 million, or 13 cents per share, a year earlier. Analysts polled by Thomson Reuters were looking for earnings of 33 cents. The company itself was targeting earnings of 31 cents to 33 cents per share.

LULU has surpassed estimates for more than 12 consecutive quarters. Perhaps more impressively, LULU exceeded Wall Street’s top-line forecast with double-digit growth. That kind of performance has become a rare event in corporate earnings for a number of years.

Revenue rose 10% to $423.5 million from $384.6 million a year earlier. The Street forecast stood at $418.9 million, while the company’s forecast was a range of $413 million to $418 million.

However, there were some blemishes on the results, as same-store sales fell 1% and gross margin contracted.

That said, the market is rightly excited by the top-line results, as they help confirm that LULU remains a desirable brand. Another quarter like the last one could return LULU stock to pre-crisis levels.

But only if investors remain okay with an increasingly pricey valuation. LULU stock goes for 29 times forward earnings. True, that’s not crazy expensive for a company expected to grow 17% per year, but neither does it look like much of a bargain. Even worse, LULU is roughly twice as expensive than competitors on a price-to-sales basis.

If you’re comfortable with paying a premium for a stock this far into its comeback, LULU looks like a decent bet. The market for activewear continues to grow robustly. If LULU can continue to claw back lost market share, you can expect revenue, profits and the stock price to follow.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/06/lulu-stock-lululemon-earnings/.

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