Strong Earnings Very Well Could Carry LULU Stock to New Highs

A beat-and-raise Q3 print could propel LULU stock higher into the end of 2019

It’s been a great year for athletic apparel brand Lululemon (NASDAQ:LULU). The company has sustained second-to-none popularity in the red-hot U.S. women’s athletic apparel sector, while also successfully expanding into the men’s and international athletic apparel segments. This has powered huge revenue, comparable sales, and profit growth in 2019, the sum of which has in turn powered huge gains in LULU stock.

Strong Earnings Very Well Could Carry LULU Stock to New Highs
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Year-to-date, LULU stock has climbed 85% to all time highs.

This record 2019 rally in Lululemon stock will be tested in early December when the company reports third-quarter numbers. Most data points suggest that those numbers will be really good.

Additional data points suggest that the holiday quarter guide should be strong, too. But, up 85% year-to-date and trading at a record-high 50-times forward earnings, LULU stock appears fully priced for yet another beat-and-raise earnings report.

Thus, the big question on everyone’s mind — will a beat-and-raise Q3 earnings report be enough to lift Lululemon stock?

I think so. Although caution is warranted given valuation risks, there is enough momentum in this name to keep shares on an uptrend through the holiday season.

Lululemon Earnings Will Be Good

Most data points suggest that Lululemon’s third-quarter earnings will be yet another beat-and-raise report.

Demand data remains robust, as Lululemon just registered an all-time high mind-share reading on Piper Jaffray’s Fall 2019 Taking Stock With Teens survey. Search interest data also remains robust, as domestic and international search interest related to “Lululemon” has continued to rise steadily year-over-year over the past several months, including a big spike during the Black Friday weekend.

Web traffic data remains equally favorable, with both Alexa and SimilarWeb showing site rank gains for Foot traffic data also remains favorable, as — the world’s leading foot traffic platform — shows that Lululemon’s in-store traffic has been rising at a robust rate throughout all of 2019.

Net-net, it looks like Lululemon had a strong third quarter, and that third-quarter numbers will come in well above what look like very beatable estimates.

At the same time (and perhaps more importantly) Lululemon appears to be off to a red-hot start in the holiday shopping season. I strolled through several malls in the Southern California area during Black Friday weekend. At every one of them, the Lululemon store was packed.

This was more than just a SoCal phenomenon. Northern California had packed Lululemon stores this past weekend, too. Lululemon stores in Kentucky, Connecticut, Nevada, Illinois, and pretty much everywhere else were also packed.

Thus, it appears that Lululemon had a great Black Friday weekend. This strong start to the holiday season will give management confidence to give a strong holiday quarter guide in the Q3 print.

Lululemon Can Keep Grinding Higher

Lululemon stock is sprinting into what looks to be a beat-and-raise third-quarter earnings report. But, will those strong numbers be enough to lift an already extended LULU stock?

I think so. Sure, the valuation on Lululemon stock is extended. A 50-times forward earnings multiple is a big multiple for a sub-20% revenue grower. It’s also a big multiple to pay for a retail stock. More than that, this is the richest valuation the stock has ever received, and yet both revenue and profit growth are projected to slow over the next few years.

In other words, there’s no skirting around the truth here: LULU stock is richly valued.

But, in the market, stocks with healthy momentum tend to march higher despite valuation risks. I think that is exactly what we will get with LULU stock over the next few months.

This is a best-in-class retail company, with a ton of growth potential, sprinting with a ton of momentum into what projects to be a record holiday shopping season. What investor wants to sell into that dynamic? Very few. Most investors want to buy into that dynamic.

That’s exactly what they will do. This consistent buying pressure will keep LULU stock on a healthy uptrend into the end of the year.

Bottom Line on LULU Stock

LULU stock is a long-term winner with a big upside catalyst on the horizon (the holiday season will bring in record sales). Sure, the valuation underlying LULU stock is rich. But, the story here is too good to ignore. Investors won’t sell this red-hot retailer this holiday season. They will buy it. As they do, shares will keep moving higher.

As of this writing, Luke Lango was long LULU.

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