Lululemon’s [LULU] share price has been lagging in the lead up to its Q4 results as the ongoing coronavirus epidemic dampens sales. Will traders have a reason to be cheerful when the athleisure company reports on Thursday?
Lululemon’s share price has dropped over 17% year-to-date.
Despite reporting strong numbers over the past year, the recent impact of the pandemic is likely to add pressure to the activewear company’s figures for Q4 - as well as on the company’s share price -, which it is due to report on 26 March.
Lululemon is expected to offer an update on the impact of the virus during its earnings call, which will include details on how temporary store closures in China, Europe and the US will affect its business for 2020. So, how was Lululemon’s share price performing prior to the COVID-19 outbreak?
Prior to the virus outbreak, Lululemon was one of the best-performing retailers on the high street, growing in value by almost 95% across 2019.
When it reported Q3 results in December, the company topped analyst estimates with diluted earnings per share of $0.96 versus the $0.93 cents expected, according to CNBC. Revenue also beat expectations, coming in at $916m versus the $899.7m anticipated. Same-store sales were also up 17% compared to the 14.4% anticipated.
With the help of a growing men’s department — which grew its revenue by 38% in Q3 — Lululemon has been looking to take on the likes of Nike [NKE] and Under Armour [UA]. The company has said it is aiming to quadruple its international revenues by 2023. It was also aiming to expand initiatives such as experiential stores that offer fitness classes and eateries, as well as offering loyalty programmes.
Revenue growth in Q3 with the help of menswear
Despite the solid performance, the company’s anticipated figures for Q4 arrived below analyst estimates in December, CNBC reported. Lululemon said it would earn between $2.10 and $2.13 per share, while analysts had been expecting $2.13. It also called for revenues to fall between $1.32bn and $1.33bn, also below analyst expectations.
Is Lululemon’s selloff overdone?
Some analysts argue that with Lululemon’s strong past performance, the recent selloff is more likely a result of spooked investors unloading stocks indiscriminately. Writing for InvestorPlace, Matt McCall suggests that investors are perhaps looking too closely at the short-term hit the company will take from the coronavirus and recent economic downturn.
As he explains, even if Lululemon couldn’t generate revenue for an entire year — which is highly unlikely — it would lose around $2.5bn. This is a fraction of the $12bn decline in market capitalisation the stock has seen in the last month.
Even with the closure of its stores, Lululemon has a solid ecommerce business —accounting for a quarter of its total sales — that will continue to serve customers during the temporary close of its stores, making such a steep drop in revenue improbable.
“This is a short-overreaction, plain and simple,” says McCall. “The math doesn’t work any other way”. He adds that now might be the opportunity for investors to purchase stock in one of the best apparel plays in the world at a discount price.
With a price-to-earnings ratio of 39.12, it shows there is still investor optimism about Lululemon — even if it has fallen from 58.7 before the virus.
|PE ratio (TTM)||45.12|
|Quarterly Revenue Growth (YoY)||22.50%|
Lululemon share price vitals, Yahoo Finance, 25 March 2020
Despite uncertainty if Lululemon were to announce good news in this week’s earnings call it could open the door to a rally, Nicolas Chahine writes in InvestorPlace. “It is a quality retailer caught in the storm of panic selling. And I believe it will find a bottom soon,” he says.
Investors need to be “cautious and patient” until then, he urges. “Not that Lululemon needs any other oomph, but its quarterly earnings report is just around the corner, and that story is likely to be grim.”
“Not that Lululemon needs any other oomph, but its quarterly earnings report is just around the corner, and that story is likely to be grim” - Nicolas Chahine
“Just remember,” he says. “Lululemon remains a solid company.”
Among 29 analysts the median 12-month share price forecasts for Lululemon is $250. The estimate represents a 61% increase from 19 March’s closing price of $154.86, according to CNN Business. The current consensus among 33 investment analysts polled is to buy the stock.