Lululemon (NASDAQ:LULU) was one of the hottest trades on Wall Street in 2018. Until it wasn’t. LULU stock has rallied a whopping 90% this year. But it has struggled recently and is down nearly 10% from its recent highs.
Is this dip an opportunity to buy a red-hot stock on a pullback? Or is it the beginning of a longer downturn in Lululemon stock?
I think it’s the former. LULU remains the hottest brand in athletic apparel, and the macro retail environment in the U.S. has strengthened over the past several months. Thus, I think this company is set to report robust third and fourth quarter numbers.
LULU Stock Likely to Head Higher Over the Longer Term
Over the longer term, Lululemon has a quality brand, a great growth outlook, and tons of expansion potential. Thus, as long as LULU’s management keeps executing well, Lululemon stock will head higher over the next several months and beyond.
In the big picture, then, this pullback is nothing more than a healthy valuation reset. When LULU stock climbed over $160, its valuation got ahead of itself. Now that valuation is normalizing downward to more sustainable levels. Because the company’s fundamentals are strong, this selloff will become a buying opportunity once Lululemon stock hits its technical support levels.
The next technical support level is at the 50-day moving average of $143. Thus, I think Lululemon stock still has more room to fall in the near-term as rising rates and tariffs create broader market weakness. But LULU stock should reverse course as it closes in on $140, and that is when you should consider buying the dip.
Breaking Out of Its Niche
Lululemon has been red-hot lately, and its success has everything to do with this company breaking out of its shell.
Traditionally speaking, LULU was a niche, U.S.-focused women’s yoga pants retailer that had a devout core demographic, but did not have much appeal outside of that niche. Men wouldn’t be caught dead wearing the brand. It didn’t sell much besides yoga apparel, and it had no presence overseas.
That has all changed dramatically over the past several quarters. As Lululemon has broken out of its niche shell, LULU has broken out to new highs.
Today, Lululemon is turning into a global athletic apparel retailer with a wide reach that extends far beyond the women’s yoga market. More men are wearing Lululemon clothes. The company is also selling more running, general workout, and leisure apparel. And its international business is red-hot, led by its aggressive expansion in Asia.
This transition from niche to mass market is still in its infancy. Lululemon is slated to generate just over $3 billion of sales this year. The annual sales of other mass-market athletic apparel giants like Nike(NYSE:NKE), Adidas (OTCMKTS:ADDYY), Under Armour (NYSE:UAA), and Skechers(NYSE:SKX), range from about $5 billion to nearly $40 billion.
Thus, if Lululemon can continue to grow its brand presence and awareness in markets outside of yoga, its runway for future growth is quite promising.
LULU Stock Should Bounce
Given strong underlying fundamentals, the current selloff of LULU stock should be viewed as nothing more than a healthy valuation reset of a promising company with a great long-term growth outlook. This reset will end once two things happen. One, LULU stock needs to hit its technical support levels. Two, LULU needs a fundamental catalyst to reinvigorate investors’ confidence.
Fortunately, both of those things should happen for LULU before the year is over.
Lululemon stock is rapidly approaching its 50-day moving average, which is $143. This 50-day moving average has served as a strong line of support for LULU stock ever since it started breaking out in late 2017. The stock has previously tested the 50-day twice during this run. Both times, the 50-day held, and LULU stock sharply reversed course. Thus, a good buying opportunity could be created if LULU stock drops to $143.
Also, Google search trends imply that Lululemon’s brand awareness is still growing, while macro retail sales and consumer confidence data points imply that the consumer is strong. The combination of continued operational momentum and widespread consumer strength should lead to robust holiday numbers for LULU. Strong holiday numbers will provide the catalyst that LULU needs to break out of this slump.
Overall, due to both technicals and fundamentals, LULU stock should bounce if it falls to $140 within the next few weeks.
Bottom Line on LULU
LULU stock is a long-term winner undergoing a natural and healthy valuation reset right now. Eventually, this reset will end, and Lululemon stock will head higher. That reversal should happen within the next few weeks when LULU is in the $140’s. Thus, if LULU drops towards $140, I would consider buying the shares.
As of this writing, Luke Lango was long SKX, and may initiate a long position in LULU within the next 72 hours.
