Fast growing athletic apparel company Lululemon (NASDAQ:LULU) used to be one of the hottest investments on Wall Street. The company’s unparalleled revenue growth and margin expansion in the retail world made LULU stock the Street’s favorite athletic apparel investment in early-to-mid 2018.
Between January and October, the stock more than doubled, while the S&P 500 rose less than 10%. Then, the stock tumbled. In October, this was a $160 stock. Today, it is a $130 stock.
The opportunity here is that LULU stock tumbled for no apparent reason, and the company has an earnings report on the horizon which could remind investors of why this stock doubled earlier this year.
The fall from $160 to $130 was because of broader market concerns surrounding rate hikes and tariffs. Those concerns have been largely suppressed over the past several days. Meanwhile, the last fundamental update the market received from Lululemon (Q2 earnings in August) were really, really good.
As such, LULU stock looks attractive heading into Q3 earnings, which are due after the bell on Thursday. Those earnings should be pretty good. If they are, LULU, which has dropped big since its last earnings report (ER), could pop in a big way, especially with broader market sentiment improving.
The Setup into Earnings Is Favorable
When talking about earnings plays, you want to look for favorable setups. One is a stock that has sold off steeply since its last ER despite no apparent deterioration in the underlying fundamentals.
That is exactly what you have with LULU stock. Since the last earnings report, LULU stock is down nearly 15%. During that same stretch, the S&P 500 is off 5%.
The implication is that the underlying fundamentals at Lululemon have significantly deteriorated since the last ER. But, they haven’t. Second quarter earnings were very good.
It was yet another double-beat-and-raise report that comprised nearly 20% comparable sales growth, nearly 50% digital sales growth, several hundred basis points of gross and operating margin expansion, and just shy of 100% EPS growth.
Those are unprecedentedly strong growth numbers. Considering the holiday shopping season is off to a robust start, there’s no reason to believe those numbers have cooled at all over recent months.
One could argue that Lululemon, as a company with a big valuation and lots of international growth potential, was being weighed by broader market concerns. Specifically, the threat of aggressive rate hikes from the Fed pressured LULU’s 40 forward multiple, while the threat of bigger tariffs pressured the company’s international growth trajectory.
But, both of those threats have been significantly reduced over the past several days, and broader market sentiment is dramatically improving. As such, if those were the things dragging on LULU stock, they should no longer be as big of drags going forward.
Overall, the set up for LULU stock here is quite favorable. You have a really beaten up stock that has dropped due to no fault of its own, but rather broader economic concerns. Those concerns were overstated.
Now, broader market sentiment is improving. Thus, all you need here is the right catalyst to send LULU flying higher.
The Numbers Should Be Pretty Good
That right catalyst for LULU stock could be yet another strong beat-and-raise earnings report.
Lululemon is set to report third quarter earnings after the bell on Wednesday. All signs point to that report being very good. First off, Lululemon has now reported back-to-back quarters of near-20% comparable sales growth.
That is tremendous operational momentum. Competitors like Nike (NYSE:NKE), Under Armour (NYSE:UAA), and Skechers (NYSE:SKX) are struggling to get 10% overall sales growth. Lululemon is doing double that on comparable sales.
Moreover, it doesn’t look like that momentum has slowed at all recently. During Black Friday weekend, Lululemon stores were highlighted across the country in local newspapers as being among the most busy and most packed retail locations. See these articles from Detroit, Minnesota, Cincinnati, Denver, Honolulu, Las Vegas, and Omaha, to name a few.
Also, Lululemon’s online search interest spiked to an all time high both domestically and globally over Black Friday weekend. The company’s website also crashed during the weekend, yet another indication of huge traffic volumes.
Overall, it looks like Lululemon’s red hot early-to-mid 2018 momentum hasn’t cooled in late 2018. As such, Q3 numbers should be just as good as Q1 and Q2 numbers. If so, the Q3 earnings report could be the exact catalyst LULU stock needs to bounce back.
Bottom Line on LULU Stock
Lululemon is a rapidly growing athletic apparel company that is starting to come into its own as the brand goes international and non-yoga apparel adoption accelerates. This robust growth narrative hasn’t cooled at all over the past several months. But, LULU stock has. That makes the stock an interesting “buy the dip” candidate ahead of Q3 earnings.
As of this writing, Luke Lango was long LULU, NKE, and SKX.
