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Lululemon’s share price is in good shape ahead of Q3

Lululemon [LULU] is expected to report a 28% year-over-year rise in revenues and a 19.8% increase in earnings when it reports its third-quarter figures on 9 December. 

Analysts at Zacks forecast that the athletic wear maker will report revenues of $1.43bn and earnings of $1.39 per share. It has been boosted by demand for its clothing as shoppers, flocking back to stores, buy health and fitness products and simultaneously expand their casual wardrobes suitable for working from home.  

Revenue from the acquisition of interactive home fitness studio brand Mirror, which Lululemon bought for $500m in 2020, is likely to accrue this quarter. The product is well-suited to people exercising at home to stay away from crowded spaces like public gyms in the wake of COVID-19.

 

 

 

“Covid accelerates consumers health & wellness focus and fashion casualisation, both of which should benefit Lululemon,” wrote Kimberly Greenberger, equity analyst at Morgan Stanley, in a note to clients.

Lululemon’s e-commerce figures are also tipped to be strong, with services such as kerbside pickups, same-day deliveries and BOPUS (buy online, pick up in-store). It is also, according to Zacks, enhancing features like search, browse, checkout, personalisation and online payment methods. 

In-store changes such as virtual waiting lists to reduce queuing time, mobile point-of-sale technology and appointment shopping are also expected to have gone down well with customers. 

Its figures will mark a slowdown from the second quarter, where revenues rose 61% to $1.5bn and EPS jumped 123% to $1.65. The comparable figures may be skewed because the company closed over 500 stores amid pandemic lockdowns in the same quarter of 2020.

28%

Expected rise in Q3 revenues year over year for Lululemon

 

Dealing with the supply chain squeeze

In its Q2 results, Lululemon’s management flagged higher air freight costs as it coped with COVID-19 impacts on logistics availability, such as the closure of factories in Vietnam. It partly offset the rising supply chain bills by reducing markdowns on its clothes. 

Whether the well-documented issues with global supply chain squeezes, port congestion, reduced airfreight capacity and the emergence of the new Omicron COVID strain will further hit the business will be a key focus of the Q3 announcement. Will the group have enough inventory to meet the surging consumer demand, especially ahead of Christmas? 

As reported by the Motley Fool, the group’s inventory level was 17% higher than last year in its second-quarter results but below its target of 25% to 30%. 

What Lululemon has done with Mirror since the acquisition will also interest analysts. In its second-quarter announcement, chief executive Calvin McDonald said Mirror shop-in-shops were available in 150 of its stores and that the plan was to ramp this up to 200 in time for Christmas, reported the Motley Fool.

 

Lululemon’s share price is looking sharp

A successful holiday season, including Black Friday and Cyber Monday figures, will be another fillip to the Lululemon share price, which has been looking sharp this year. 

Over the last 12 months, the Lululemon share price has climbed 15.5%, with a 53% hike recorded since 4 March to close at $435.72 on 3 December. 

“We believe that brand strength, revival in brick-and-mortar stores and continued strength in the e-commerce channel are likely to keep its stellar show on...Lululemon is well-placed to capture the growing online demand and ensure a robust shopping experience” - Zacks

 

According to MarketScreener, analysts expect the trend to continue with a consensus rating of ‘outperform’ and an average target price of $452.70.

“We believe that brand strength, revival in brick-and-mortar stores and continued strength in the e-commerce channel are likely to keep its stellar show on,” said Zacks. “Lululemon is well-placed to capture the growing online demand and ensure a robust shopping experience.” 

Morgan Stanley has a base target price of $310, with a high of $528 in a bull scenario and a worst-case $230. B.Riley has a target price of $548, Deutsche Bank has a $486 target price, and BMO has a price of $344.

“Lululemon is a long-term topline grower, supported by compelling secular tailwinds (e.g. performance, athleisure focus), a market share gain opportunity and credible future revenue drivers (e.g. international expansion, digital growth and product innovation and expansion into new categories),” wrote Greenberger of Morgan Stanley.

Its supply chain challenges are expected to continue into 2022. Any resurgence of COVID infections and return to restrictions would certainly hamper store sales — but Lululemon continues to stride ahead on innovation, design and demand. 

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