I haven’t been the biggest bull on Lululemon Athletica Inc. (NASDAQ:LULU) stock. For several years now, I’ve been wary on LULU stock as a long-term investment due to a full valuation.
Indeed, over the past five years, LULU stock has fallen 5% while the S&P 500 has rallied nearly 90%. Nike Inc (NYSE:NKE) is up nearly 150% in that time-frame, while even the much maligned Under Armour Inc (NYSE:UAA) is simply flat in that time frame. That isn’t terribly good news for LULU stock.
But over the past year, both LULU stock and the S&P 500 are up about 20%. NKE stock is up only 18%, while UAA stock is off more than 50%.
Is LULU stock finally shaping up to be a long-term winner?
I don’t think so. The valuation is reasonable, but the stock isn’t undervalued to a point where it should produce out-sized returns for the next several years. Competition is also coming in a big way, from both Nike and Amazon.com, Inc. (NASDAQ:AMZN).
But I do think LULU stock is winning right now. This winning should continue on Wednesday, when Lululemon reports third-quarter numbers. My research suggests those numbers will be quite good. Strong numbers against the backdrop of a reasonable valuation (28x earnings for 14% projected growth) and tax reform (LULU’s effective tax rate hovers around 30%) should lead to a big rally in LULU stock.
I’m buying into the report.
Strong Quarter From Lululemon
I think Lululemon had a really good quarter.
As I’ve covered multiple times before on InvestorPlace, there is a seismic shift in athletic retail right now from wholesale to direct (read more about it here). In short, athletic brands like Nike and Skechers USA Inc (NYSE:SKX) are emphasizing direct over wholesale, launching their own stores and investing heavily in direct-to-consumer sales channels.
LULU sells entirely direct. You can’t buy a pair of Lululemon leggings anywhere but inside a Lululemon store or through the company’s website. Naturally, this direct-selling strategy is benefiting the athletic apparel brand amid this seismic shift in athletic retail.
This is why LULU reported strong second-quarter numbers. I think these benefits continued in the third quarter.
Search interest trends for Lululemon look really good. Black Friday / Cyber Monday 2017 represented the brand’s highest search interest during that all important shopping period ever. Part of that is certainly a growing digital sales mix, but part of it is just the LULU brand regaining favor among consumers.
Analysts have also noted that Lululemon stores were packed during Black Friday. It looks like the company used hip hop music to create a “retail-tainment” environment that drove huge traffic.
Moreover, Advance Monthly Sales retail data has been favorable for the clothing sector. Trailing three month sales for clothing stores has been trending in the up 1% or more range for several months now. That is a pretty good read from an industry that is supposed to be dying.
This macro data is corroborated by a slew of positive earnings reports from mall retailers. It looks like mall traffic is actually coming back. Just look at mall retail stocks. American Eagle Outfitters (NYSE:AEO) and Abercrombie & Fitch Co. (NYSE:ANF) are both up 30% over the past three months. Gap Inc (NYSE:GPS) and Tilly’s Inc (NYSE:TLYS) are up 40% over the past three months. Urban Outfitters, Inc. (NYSE:URBN) is up more than 50% over the past three months.
This resurgence in mall retail traffic is huge for Lululemon.
Overall, it looks like LULU stock had a pretty strong quarter, aided by a resurgence in mall traffic and renewed interest in the Lululemon brand.
Bottom Line on LULU Stock
The long-term outlook on LULU stock, though, is still plagued by a full valuation. At 28x this year’s earnings for 14% earnings growth prospects, LULU stock trades roughly in line with the market (which trades at 20x 2017 earnings for 10% growth prospects). In this sense, LULU stock is reasonably valued, but not undervalued.
That means LULU stock won’t likely produce multi-year outsized returns from these levels.
But LULU stock could get a big near-term bounce with strong third-quarter numbers. I think that will happen, so I am bullish on LULU stock in the near-term.
As of this writing, Luke Lango was long LULU, NKE, AMZN, SKX, AEO, ANF, GPS, and URBN.