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Is Lululemon Stock Too Risky to Bet On Before Earnings?

LULU Is a long-term winner, but the market has priced in expectations

Source: Shutterstock

Lululemon (NASDAQ:LULU) reports earnings on Wednesday, June 12. LULU stock has developed a reputation for significant movements following earnings reports. Hence, the Vancouver-based apparel maker will probably face high expectations going into the report. Still, while I see LULU as a long-term winner, the report may not bring the positive catalyst that many expect.

Is Lululemon Stock Too Risky to Bet On Before Earnings?
Source: Shutterstock

Wall Street forecasts the company will earn 71 cents per share in its first quarter. If this holds, that will represent a 27% increase from the same quarter last year when LULU reported 55 cents per share in profit. Analysts also predict revenues of $757 million for the quarter. This would be a 16.2% increase from year-ago levels of $649.71 million.

Given its earnings history, holders of LULU stock may expect a little more. LULU has beat earnings for the last eight quarters and sales forecasts in the previous 13 reports. Moreover, Wall Street predicts earnings growth of 20.6% for the current year and 17.9% the next.

Also, for the last five quarters, the LULU stock price has moved by more than 10% (in one direction or the other) following the report. All of these factors should bring high expectations.

The company’s signature yoga pants have put the company on the map. However, it has quickly emerged as a full-fledged athletic brand. They will expand into athletic shoes as well as personal care products. Lululemon even has added a line of menswear. They have also begun to test a loyalty program that will compare to Amazon’s (NASDAQ:AMZN) Prime membership.

Report May Not Bolster LULU Stock

Since their specialty remains women’s yoga pants, it remains unclear how successful these other lines will become. While the sale of menswear should increase sales, it remains unclear how much of a following a maker of women’s yoga pants will attract in this market. However, this places the company in more direct competition with Nike (NYSE:NKE), Under Armour (NYSE:UA, NYSE:UAA) and Adidas (OTCMKTS:ADDYY).

One other factor will heighten expectations further. In the previous quarter, Lululemon stock spiked higher by over 14% the day after its March earnings report. Many traders will inevitably buy LULU in hopes of a repeat performance. While that could happen, I would caution against buying for that reason. Following the December report, LULU stock fell by more than 13% despite an earnings beat.

Moreover, LULU trades at a price-to-earnings (P/E) ratio of around 47.3. It also trades close to 31.2 times earnings on a forward basis. Given the expected profit growth rate and the likelihood of beating estimates, I do not see LULU as significantly overvalued. However, I believe the market has priced in the positives of this stock.

I stated in a recent article that LULU stock would probably follow overall market trends. Since I reported that on April 10, LULU has fallen by slightly more than 1%. In comparison, the S&P 500 has fallen by a little more than 2% as of the time of this writing. Hence, that has largely held so far. Furthermore, trends do not appear favorable with the overall economy facing trade wars and slowing growth. While earnings could inspire a significant move in the stock, I believe it will continue to follow overall market trends closely.

Final Thoughts on LULU Stock

Given the history of LULU stock, the earnings report should spark a reaction, though not necessarily a positive one. Lululemon stock consistently beats estimates. The company has also gone into business lines that should place them into deeper competition with firms such as Nike. However, beating earnings estimates has not necessarily taken the stock higher. Further, investors should not assume that the success LULU enjoyed with women’s yoga pants will carry over into other clothing or product lines.

Finally, as for its current valuation, it will probably follow the market in the near term. Although Lululemon will probably continue its long-term growth, I would still encourage patience with LULU stock.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

Article printed from InvestorPlace Media, https://investorplace.com/2019/06/lulu-stock-wear-well-going-earnings/.

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