Categories AlphaGraphs, Earnings

Earnings preview: Here’s why Lululemon (LULU) might gain further ahead of Q3 report

Lululemon Athletica (NASDAQ: LULU) has achieved steady market-cap growth in recent years, often raising concerns about the stock’s high valuation. Having tackled competition from the e-commerce space effectively, the sports apparel retailer continues to impress the market with its robust quarterly performance.

Underlining the bullish view, the majority of analysts following the company recommend buy, signifying the growth potential of the stock in the long term. Also, the price target has been raised to an average of $250, ahead of the third-quarter earnings report.

lululemon comp sales trend

The Canada-based firm, which pioneered the concept of athleisure, will be reporting its third-quarter results on Wednesday after the closing bell. Market watchers are looking for earnings of $0.93 per share on revenues of $899.64 million, representing a 24% annual growth. It has an impressive track record of beating estimates, which adds to the chances of another beat.

Bullish Outlook

The positive outlook for the athleisure industry bodes well for the company. What gives it an advantage over rivals is the promotional initiatives, such as the rollout of loyalty program in select markets, eliciting positive response from the market. In addition, the efforts to attract customers to stores with competitive pricing and a revamped product portfolio are paying off, with the most recent additions being menswear and self-care products.

Related: Lululemon Q2 2019 Earnings Conference Call Transcript

The other growth drivers include the expansion of the digital platform and direct-to-consumer business. While the market conditions remain conducive for Lululemon to maintain the current momentum, the high valuation of the stock is a concern.

Global Expansion

In the long term, the ongoing expansion into new geographic regions, with focus on new store-openings, should help the company meet its growth targets. Meanwhile, the bottom-line might be affected by high spending on expansion initiatives.  

In September, the company reported a double-digit increase for second-quarter comparable-store sales, continuing the trend, which prompted the management to lift the full-year guidance. Revenues advanced 22% annually to $883.4 million, beating the forecast. At $0.96 per share, earnings were up 35% from last year and above the estimates.

Sports Apparel Market

Among competitors, Under Armour (UAA) recently reported above-consensus results for the third quarter but the market responded negatively as the management slashed its sales outlook. Nike (NKE) is set to unveil its second-quarter numbers next week, after posting stronger-than-expected results for the first quarter, triggering a stock rally. The sneaker giant bets on the strength of its digital platform and direct-to-consumer business to sustain the momentum.

Also Read: Is Lululemon’s bull run coming to an end?

Lululemon’s shares set new records consistently over the years, all along outperforming the sector and the larger market. The value rose by two-thirds since the beginning of the year and nearly doubled in the past twelve months.

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