While the consumer economy struggled since last year due to blistering inflation (along with the subsequent hawkish monetary policy response), athletic apparel retailer Lululemon (LULU) appears no worse for wear. Following Tuesday’s strong fiscal fourth-quarter earnings report, LULU stock soared during the midweek session, eventually closing up nearly 13%. Still, not every expert is convinced that LULU will continue on its northbound trajectory.
Nevertheless, for the time being, the narrative presents an encouraging backdrop. First, the retailer surprised market observers with its resiliency. According to Zacks Equity Research, Lululemon posted adjusted earnings per share of $4.40, representing an increase of 30.6% on a year-over-year basis. Additionally, the figure handily beat Wall Street’s consensus estimate of $4.25.
As well, the investment resource noted that the company’s adjusted earnings improved 25% on a three-year compounded annual growth rate (CAGR) basis.
On the top line, Lululemon generated revenue of $2.77 billion, exceeding the consensus target of just under $2.7 billion. Per Zacks, on a constant-dollar basis, revenue improved 33%. Further, net revenue increased by 26% on a three-year CAGR basis.
Fundamentally, the comprehensive earnings beat demonstrated that for higher-income households, consumers are willing to still pay for premium-label discretionary products. Perhaps sensing the inherent opportunity, LULU stock represented a top highlight in Barchart’s screener for unusual stock options volume.
Specifically, total volume reached 226,126 contracts against an open interest reading of 176,257. Further, the delta between the Wednesday session volume and the trailing one-month average volume came out to 830.29%. Call volume reached 129,559 contracts against put volume of 96,567.
Since the start of the year, LULU stock gained nearly 12% of equity value. As a result of the enthusiasm surrounding Q4’s results, the loss in the trailing year was mitigated to 4.21% below breakeven. While the consensus among market experts rates LULU as a buy, not everyone is convinced.
LULU Stock Entices But Also Presents Risks
Unsurprisingly, Wall Street analysts largely broadcasted optimism for LULU stock following the underlying company’s strong Q4 print. For instance, Citi analyst Paul Lejuez upgraded his assessment for LULU to “buy” from “neutral.” In addition, the expert raised his price target to $440 from $350, noting that he sees “no signs of a sales slowdown” in a research note.
Nevertheless, the bullish view for LULU stock is not unanimous. For example, Bernstein analyst Aneesha Sherman reaffirmed an “underperform” rating while still raising the price target to $320 from $290.
“We like Mgmt's decisions on China, Mirror and costs, all of which will protect margins,” Sherman said in a note. “Moving away from the previous scattershot approach, intl expansion is focused on China now, a profitable mkt with upside on market share, store productivity and margins,” she added.
Also, per Barron’s, Jefferies analyst Randal Konik also slightly downplayed the broader significance of the Q4 earnings report. “With a strong start to 1Q and better-than-expected FY [fiscal-year] outlook, we believe the expectations bar has now been set very high,” Konik wrote. At the moment, Konik pegs LULU stock as “underperform,” though he raised his price target to $225 from $200.
Indeed, heightened expectations may end up creating pressure for Lululemon. Specifically, the mass layoffs witnessed throughout 2022 – particularly in the high-paying technology sector – continued into this year. Recently, Meta Platforms (META) announced a round of layoffs, which involves the elimination of 10,000 positions. The company also canceled 5,000 openings it failed to fill.
With more people losing their primary source of income, almost every consumer discretionary enterprise faces risks. Therefore, investors should approach LULU stock with caution.
Lululemon May Depend on Post-Pandemic Trends
At the end of the day, Lululemon’s viability may come down to the stickiness of post-COVID-19 social behaviors. As a provider of casual athletic apparel, Lululemon’s products fit very well with the work-from-home initiative. However, as more companies decide to recall their employees back to the office, this framework may change.
Also, with challenging economic factors come the need to decide more carefully where to direct available funds. In other words, if a majority of corporations move operations on campus, then funds earmarked for apparel will likely pivot toward professional or at least business casual attire. Thus, while LULU stock appears intriguing, it’s not holistically a bullish narrative.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
