Lululemon Athletica inc.: LULU Stock Still Has a Lot to Prove

Lululemon Athletica inc. (LULU) reports earnings Wednesday and investors will be keen to see if the athletic apparel retailer can beat Wall Street estimates once again and keep the recent upside in LULU stock going.

Lululemon Athletica inc.: LULU Stock Still Has A Lot To Prove

If not, it could prompt a selloff on profit taking because shares have had a great run.

Lululemon stock had a miserable 2015, but bounced back sharply this year. LULU is up 30% for the year-to-date vs. a gain of just 3% for the broader market. That’s fantastic outperformance. However, it feels somewhat precarious.

After all, the athleisure segment isn’t as fashionable as it once was, and competition — Under Armour Inc (UA) and Nike Inc (NKE) — is more intense than ever. LULU’s notorious founder, Chip Wilson, recently wrote a scathing letter to shareholders accusing the company of having “lost its way.”

He does make some good points. Since the current management team took over less than three years ago, LULU stock has indeed underperformed peers and the S&P 500 by a wide margin.

He’s right. Lululemon stock is off more than 2% since then end of 2013, while the broader market gained more than 16%. UA is up 80% and NKE is up 35% over the same span.

If LULU stock is to keep its mojo, the company has to show that it’s getting out from under its excess inventory and related margin woes.

The company did appear to make progress on clearing inventory when it last reported quarterly earnings, but revenue and margins remain below peak levels. Investors are right to worry about LULU’s sales amid a wider recession in retail, especially given that at 27 times forward earnings, Lululemon stock doesn’t exactly scream, “bargain.”

LULU Stock: Earnings Set to Decline

For the most recent quarter, analysts on average forecast earnings of 31 cents a share, down from 34 cents a share a year ago. At the same time, sales are forecast to rise 15% to $488 million, so you can see how weak margins are playing havoc with the bottom line.

It shouldn’t be a surprise if LULU tops Street estimates. It beat on both the top and bottom lines last time it reported earnings, and — after issuing disappointing forecast — should have a low bar to clear once again.

But even if LULU keeps its upward trajectory intact, investors have to worry about how much possible upside is left in this name. It’s clear that the momentum story is over. Revenue growth is decelerating and shares look to be fully valued at the least.

LULU has a good chance of popping on earnings Wednesday, but longer-term questions remain about how it can catch up to the twin titans of UA and NKE.

Shares have been a great rebound play this year, but if LULU doesn’t demonstrate real progress on the revenue and margin fronts, don’t be surprised if market participants take their winnings and go home.

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

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