Is Lululemon’s Share Price Set to Bounce After Q2 Earnings?

The Lululemon share price surged 107.5% from $138.98 at the close on 16 March 2020 to $386.07 at the close on 17 December. Despite having to close stores during lockdown, Lululemon benefited from more online demand as remote workers shed the suits in their home offices for something more comfortable.

Sales were also higher because of its June 2020 acquisition of interactive fitness studio maker Mirror for $500m.

The Lululemon [LULU] share price did run out of steam early in 2021, however, dropping to $285.14 at the close on 4 March. Investors were concerned that the lifting of lockdowns would see a return in office-working and less demand for leisure clothing, as well as a rise in inflation, which could hike up prices.

However, the Lululemon share price has recovered its strength since climbing to $414.52 at the close on 30 August after strong first quarter earnings, the re-opening of stores and continued demand for ecommerce and Mirror’s services.

It has also introduced services to improve the in-store experience such as virtual waitlists to reduce the time people have to queue, mobile point of sale technology and appointment shopping.

The Lululemon share price now sits at $388.33, as at the close on 3 September, and some investors are nervous about a potential Covid revival in cases as we head into the autumn and winter.

The Lululemon share price has grown by around 7.45% from 4 September 2020 compared with Nike [NKE] that rose 45.28% over the same period and sports clothing brand Zumiez [ZUMZ] up 46.61%. In the same period the S&P 500 gained 31.27%.

Lululemon has a 2.25% weighting in the VanEck Retail ETF [RTH], whose shares have climbed 24.06% over the last 12 months and a 3.31% weighting in the Global X Health & Wellness ETF [BFIT] whose shares are up 42.97% in the last year.

Investors will be eager to see if Lululemon's share price can get back on pace with its peers when it releases its second-quarter earnings on 8 September.

Performing above expectations

In the first quarter, Lululemon reported net revenues up 88% to $1.2bn, with store sales up 106% to $536.6m and direct-to-consumer up 55% to $545.1m.

Gross profit was up 109% to $700.3m, with diluted earnings per share of $1.11 up from $0.22 in the same period last year. This was ahead of its own expectations of revenues between $1.1bn and $1.13bn and EPS of between $0.81 and $0.85.

The Lululemon share price climbed from $317.36 at the close on 3 June – the day of the announcement – to $329.52 at the close on 4 June.

CEO Calvin McDonald stated: "Our first quarter results reflected strength across all drivers of growth, fuelled by the continued expansion in our ecommerce business and a rebound in brick-and-mortar stores. Our strong performance across categories, channels and geographies demonstrates the momentum and strength of Lululemon as we shift into the new normal.”

Three-pronged approach

The Zacks consensus estimate for second-quarter sales is $1.34bn, indicating a 47.9% increase from the same period last year. Earnings are tipped to come in at $1.20, up 62.2%.

However, ecommerce sales will be watched closely after Lululemon stated in its first-quarter earnings that they could decline modestly given comparisons with the height of the pandemic last spring.

Investors will also carefully analyse the numbers to see if the threat of a resurgence in COVID-19 infections is weighing on consumers’ minds. This could mean store closures in the months ahead although Lululemon is showing increasingly confident ecommerce performance, which would largely offset losses on account of closures. It is looking to further boost its online offerings and content.

Another area of interest for Lululemon and the industry will be supply chain issues, such as higher airfreight costs, reduced capacity and port congestion, and the subsequent impact on margins.

The performance of Mirror will be in the spotlight, given the expected boom in virtual fitness post-pandemic, as a test for Lululemon’s ‘Power of Three’ strategic plan. It was unveiled in 2019 and outlined aims to double sales in men’s and digital categories, and quadruple sales in the international unit by 2023.

If there are any signs of a slowdown, then the Lululemon share price could suffer after its announcement. However, analysts are bullish. According to Market Screener, the stock has a consensus ‘outperform’ rating and a target price of $394.48.

Telsey has Lululemon at an ‘outperform’ rating with a $460 target price, and JP Morgan has an ‘overweight’ rating with a $450 target price.

It has also made its way onto the Goldman Sachs Conviction List. “Lululemon extended its leadership position during COVID-19 in the digital channel, and we believe the company is better positioned following the pandemic to be a market leader in a secularly growing active/casual marketplace,” analysts wrote. “We see emerging tailwinds from accelerating men’s, international, membership, footwear, and long-term opportunity from Mirror to drive durable outperformance.”