There are a few reasons Lululemon (NASDAQ:LULU) looks like a good stock to buy for both medium-term and long-term investors. But I would recommend waiting until after the company reports its fourth-quarter results on March 26 before pulling the trigger on LULU stock.
I know very little about yoga, but I know that my wife occasionally does yoga at home, using YouTube videos as her guide. And after doing a little research, I found out that there are many yoga videos on YouTube. To me, that indicates that a large number of people do yoga at home.
And I think it’s quite possible that many yoga enthusiasts will continue to do yoga while they are at home. With online classes, social distancing can’t stop enthusiasts.
Some of the people who are doing yoga will probably decide to order new clothes for the activity from Lululemon’s website or from Amazon (NASDAQ:AMZN). As a result, I don’t expect LULU stock to completely crater during the crisis brought about by the coronavirus from China.
Lululemon’s Earnings Will Likely Miss Guidance
As of the end of the third quarter, Lululemon had $586 million of cash and $695 million of debt. But in the last 12 months, its operating free cash flow was $521 million, and I’m sure it could, if necessary, borrow a great deal more money from banks.
Therefore, the company, unlike many other retailers, faces zero risk of going bankrupt.
But, on the other hand, the company still had to close its stores in China in February, and it has closed its stores in North America and Europe until March 27. Moreover, the global economic slowdown will have some impact on the company’s results.
Despite all that, analysts’ average earnings per share estimate for the company’s April quarter has only fallen by 4 cents over the last 90 days, dropping from 88 cents three months ago to 84 cents now.
Given all of the negative catalysts that Lululemon is facing, I fully expect its EPS guidance to come in meaningfully below 84 cents.
New Initiatives Will Succeed in the Long Term
Lululemon is making efforts to improve its digital business. One thing it is focusing on is growing overseas and mens’ apparel sales.
Before the coronavirus outbreak, its digital sales jumped 30% year-over-year in Q3 and its e-commerce sales in China soared 60% YOY, while its overall overseas sales surged 35%. Its revenue from men surged 38%.
These growth figures are likely to slow even after the coronavirus crisis ends due to the economic slowdown. However, as yoga gains popularity around the world, I believe Lululemon will see growth.
The Bottom Line on LULU Stock
Lululemon will be able to withstand the coronavirus better than most retailers. And fortunately for shareholders, it will continue to have strong, positive catalysts, despite the economic downturn.
However, investors should expect LULU stock to fall after its Q4 report. Why? Lululemon’s EPS guidance is likely to come in below expectations.
But what does this mean? Investors who plan to hold the stock for the medium term or the long term should buy shares on weakness.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer. As of this writing, Larry Ramer did not own any of the aforementioned securities.
