For most of 2018, athletic apparel company Lululemon (NASDAQ:LULU) was one of Wall Street’s favorite trades. Red-hot comparable sales growth trends and rising margins created enormous profit growth that investors just couldn’t ignore. Consequently, LULU stock entered the year around $80, and then proceeded to double to $160 by early October.
Since then, it has been different story. LULU stock has dropped more than 20% over the past two months as investors have expressed concern that bigger tariffs and higher rates will spark an economic slowdown that will cause Lululemon’s red-hot growth to cool.
This won’t happen to the degree that investors are pricing in. The economy will cool in 2019 so long as rates keep going higher and President Donald Trump continues to fight China. But, it won’t cool enough to kill growth entirely, and stable but slower growth in 2019 will allow Lululemon to remain on a winning trajectory.
As such, this recent sell-off in LULU stock looks like a buying opportunity. This is especially true now, with third quarter earnings due in early December. Those numbers should be pretty good, and they could spark a sentiment reversal in this stock which gets shares back on an upward trend.
Lululemon Has a Ton of Momentum Right Now
There’s no hiding the simple truth about Lululemon: the brand is red hot right.
At the start of 2017, comparable sales growth at Lululemon was negative. Then, it climbed to 2% in Q2, 7% in Q3, and 11% in Q4. So far in 2018, comparable sales growth has been running around 19%. In other words, Lululemon’s most important sales momentum metric is on a healthy, multi-quarter uptrend.
This speaks to the brand’s emerging popularity as a go-to athletic apparel brand. According to a survey from Piper Jaffray, Lululemon’s popularity among American teenagers continues to grow by leaps and bounds, and the brand is now firmly the second most popular athletic brand behind Nike (NYSE:NKE) for women.
Importantly, the Lululemon leggings trend remains the top fashion trend among females by a long shot, while the brand is also starting to gain mind-share among upper-income male teens.
There are no signs that this brand’s recent momentum is going to cool any time soon. Lululemon’s online search interest trends have been favorable this year, and got a huge unprecedented spike during Black Friday and Cyber Monday, when Lululemon’s website crashed due to too much traffic. Moreover, local newspapers across the country highlighted Lululemon as being one of the most packed stores during Black Friday. This was true in Detroit, Minnesota, Cincinnati, Denver, Honolulu, Las Vegas, Omaha and more.
Overall, the near-term sales trends for Lululemon remain exceptionally favorable. While bigger tariffs and higher rates could slow those trends, they aren’t slowing yet, and won’t slow this holiday season. As such, investors should expect Lululemon to deliver yet another beat-and-raise quarter in early December, the likes of which should power LULU stock higher.
LULU Stock Has Solid Long Term Drivers
The long-term fundamentals underlying LULU stock are equally favorable.
Traditionally speaking, Lululemon 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. Lululemon has broken out of its niche shell.
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 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, 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.
Bottom Line on LULU Stock
LULU stock is a long-term winner being dragged down in the near-term by overstated tariff and interest-rate risks. Those risks may rear their ugly head down the road, but not today. Third-quarter numbers should be really good. So should the holiday quarter guide. That combination of strong numbers and a strong guide should spark a rally in beaten up LULU stock.
As of this writing, Luke lango was long LULU, NKE, and SKX.
