Lululemon (LULU) is scheduled to announce Q2 earnings results today, after market close. The consensus EPS Estimate is $2.54 (+15.5% YoY) and the consensus Revenue Estimate is $2.17B (+16.0% YoY). Would now be a good time to buy calls? Well, over the last 2 years, LULU has beaten EPS estimates and revenue estimates88% of the time.
What do the analysts think? Well according to Seeking Alpha: just over the last 3 months, EPS estimates have seen 16 upward revisions and 6 downward. Revenue estimates have seen 13 upward revisions and 8 downward.
I expect LULU stock to likely trade higher due to revenues and earnings beating market expectations marginally. Retail stocks have continued to come under pressure as economic headwinds coupled with inflation have intensified. Despite the current macro headwinds, Lululemon was able to deliver robust quarterly earnings in Q1 2023. I fully expect a similar momentum in the second quarter results as well. In the 2023 first fiscal quarter, which ended April 30, LULU’s sales increased 24% over last year to $2 billion. Comparable sales increased 13%, and direct-to-consumer revenue, what it calls its digital segment, was up 17% more than last year. However, Digital accounted for 42% of sales, compared with 45% last year. Lululemon’s balanced omnichannel options are an important element of its performance, and that’s even clearer now as the digital presence and physical stores are having a see-saw moment in how shoppers spend their money. The company remains on track to achieve its Power of Three goals it unveiled back in April 2022. The plan aims to roughly double its annual revenue from $6.3 billion in fiscal 2021 to $12.5 billion by fiscal 2026.
Notably, LULU stock had a Sharpe Ratio of 1.0 since early 2017, which is higher than the figure of 0.6 for the S&P 500 Index over the same period. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds. I’d value the stock at $390 (currently at around $380).
What do the experts think?
Analyst John Kernan from TD Cowen is bullish on the stock. Last week, he reaffirmed a Buy rating on LULU, with a price target of $531. The analyst believes Q2 was quite challenging for the apparel sector but that Lululemon performed well individually. Kernan sees the potential for LULU’s management to raise their full-year guidance, with “room to express confidence in near- and long-term targets both in North America and International.”
Additionally, KeyBanc analyst Noah Zatzkin maintained a Buy rating on LULU stock and raised the stock’s price target to $425 from $400. The analyst expects Lululemon’s 2023 sales to increase by 17%. In a research note to investors on July 25, Zatkin said that LULU is well-poised to benefit from increasing brand awareness, international expansion, and the introduction of new/innovative products.
“While the macro environment has become increasingly challenging, we’ve seen that high momentum brands have continued to perform well,” wrote Wedbush analyst Tom Nikic in a Wednesday note. Lululemon is one of those brands, he added.
Piper Sandler analyst Abbie Zvejnieks agrees, writing that recent product launches and back-to-school shopping have boosted store visits. Indeed, Lululemon’s foot traffic in the U.S. grew by double-digits every month in the third quarter, and far outpaced traffic among the broader sportswear and sporting goods sector, according to data from Placer.ai. Sales in China could also be a bright spot, Zvejnieks added, thanks to the company’s efforts to tailor its products to local markets.
What to do for Earnings?
Earnings season has been rough on other companies in the athletic wear space. Shares of Dick’s Sporting Goods (DKS) and Foot Locker (FL), for instance, both plummeted in the wake of weak reports. But I think it’ll be different for LULU. Options traders are pricing in LULU stock to move by ±7.5% after reporting earnings. The anticipated earnings move is determined by checking the at-the-money straddle of the options closest to the expiration after the earnings announcement. Last quarter, the stock rose by 11.3% after the company delivered better-than-expected results for the first quarter. This quarter I’m gonna go ahead and grab calls. For those not interested in options, buying shares is a safe bet here. However, this is purely educational and does not constitute financial advice. Lululemon’s push for new product introductions and enhanced brand awareness may further drive its expansion. Additionally, the company’s ambition to expand globally has the potential to elevate its top-line revenue.
