Case Study on Lululemon (LULU) with Nobias technology
1) Lululemon reported Q2 earnings this week, beating Wall Street consensus estimates on both the top and bottom lines.
2) The company also raised full-year guidance.
3) Shares initially popped more than 10% in response to this beat and raise quarter.
4)Credible analysts still see double digit upside ahead.
Lululemon (LULU) has been a top performer in the retail and apparel space over the last 5 and 10-year periods, posting capital gains of 415.2% and 310.0%, respectively. These gains represent strong outperformance relative to the broader market. The S&P 500 is up by 62.2% during the trailing 5-year period and 177.2% during the trailing 10-year period. However, LULU shares have struggled during the trailing 12 months, posting losses of 19.8%.
Apparel stocks have suffered from inflationary headwinds in recent quarters and coming into the second quarter earnings season, there were credible analysts expressing concern about Lululemon’s growth prospects.
LULU Sep 2022
Brain Sozzi, a Nobias 4-star rated author, recently published an article at Yahoo Finance which highlighted a negative analyst report on LULU shares coming into earnings season. Touching upon LULU’s recent weakness and the headwinds impacting the apparel industry, Sozzi wrote, “Shares of the premium athletic-wear maker are down 21% year to date, hammered recently amid warnings on slowing demand (and rising inventories) for workout gear from retailers Kohl's, Macy's, Under Armour and others.”
Sozzi went on to shine a spotlight on a report published by Jefferies analyst Randal Konik, who is a Nobias 5-star rated analyst. Sozzi quoted Konik, who said, "The quarter should be strong (belt bags likely helped too) and we expect the company's fiscal year 2023 outlook to be reiterated, but that's not our concern.”
Konik’s bearish report continued, "Our downgrade thesis is based on a view that long-term projections are aggressive across total revenues, EBIT [earnings before interest, taxes] margins, men's, and international. We believe in coming quarters, Lululemon will have to walk back its long-term projections as competition rises, end markets weaken, and promos increase industry-wide." Sozzi noted that Konik believes that Lulu’s sales are likely to continue to grow.
However, the analyst concluded his report, stating, "COVID likely pulled forward demand with Lululemon one of the biggest beneficiaries. As a result, we see risks to consensus estimates ahead as competition rises and headwinds grow."
Lululemon reported second quarter earnings this week and it appears that Konik’s negative sentiment may have been misplaced. LULU beat Wall Street estimates on both the top and bottom lines during Q2. During the company’s Q2 report, Lulu’s Chief Executive Officer, Calvin McDonald, stated: "The momentum in our business continued in the second quarter, fueled by strong guest response to our product innovations, community activations, and omni experience. I would like to express my gratitude to our teams around the world for their continued dedication and enthusiasm for our brand, which enabled us to generate this elevated level of performance. As we look ahead, we're excited about our ability to successfully deliver against our Power of Three ×2 growth plan and create ongoing value for all our stakeholders."
Also, during the Q2 report, Meghan Frank, Lululemon’s Chief Financial Officer, stated: "Our teams continue to execute at a high level, which is driving our strong financial and business performance. Despite the challenges around us in the macro-environment, guest traffic in our stores and on our e-commerce sites remains robust, which speaks to the strength of our multi-dimensional operating model. I am pleased with our start to the third quarter and believe we are well positioned for the fall and holiday seasons."
Huw Hughes, a Nobias (4-star) rated author, published a piece at Fashion United which examined the company’s Q2 results. Regarding Lulu’s top-line, Hughes wrote, “The US-Canadian company reported a 29 percent increase in net revenue to 1.87 billion dollars thanks to 28 percent growth in its North American business and 35 percent growth in its international business.” He continued, “Total comparable sales increased 28 percent in the second quarter, or 29 percent on a constant dollar basis, while comparable store sales were up 24 percent.”
Moving onto the bottom-line, Hughes stated, “Net income for the quarter came in at 289.5 million dollars, up from 208 million dollars a year earlier.” What’s more, Hughes noted that LULU management raised its forward looking guidance. He said, “The company now expects annual net revenue to be in the range of 7.87 billion dollars to 7.94 billion dollars. That’s up from its previous guidance of between 7.61 billion dollars and 7.71 billion dollars.”
Furthermore, he said, “It now forecasts diluted earnings per share to be in the range of 9.82 dollars to 9.97 dollars compared to previous guidance of between 9.42 dollars and 9.57 dollars.” This beat and raise quarter caused LULU shares to spike higher on Friday morning. LULU shares were trading up by more than 11.5% shortly after the opening bell range on Friday, September 2, 2022.
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Throughout the trading day this strength has waned a bit. It’s 12:25 pm and shares are currently up slightly less than 8%. However, it’s clear that the company’s strong guidance is overshadowing the fears that investors and analysts shared with regard to ongoing issues within the apparel space, brought on by supply chain issues, rising material costs, and inventory gluts.
Overall, the majority of the credible authors and analysts that the Nobias algorithm tracks agree with today’s upside momentum. 71% of recent articles published on LULU by credible authors (those with 4 and 5-star Nobias ratings) have expressed a “Bullish” sentiment. 5 out of the 9 credible Wall Street analysts (once again, only individuals with 4 and 5-star Nobias ratings) who cover LULU believe that shares are headed higher.
Right now, the average price target being applied to LULU from his cohort of credible analysts is $352.22. Therefore, even after today’s high single-digit pop, credible analysts still see strong upside ahead. LULU shares are currently trading for $317.50. Therefore, that average analyst price target implies upside potential of approximately 10.9%.
Disclosure: Nicholas Ward has no position in any stock mentioned in this article Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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