Company shares fell 6.71 percent Friday to $344.32 a piece, despite the athletic apparel and accessories retailer’s positive quarterly earnings report the day before, which topped more than a billion dollars in revenues.
“Lulu also acknowledged that holiday trends were strong [quarter-to-date]; however, the company was once again prudent in its go-forward outlook given capacity restrictions in stores and the potential of sales being pulled forward,” Paul Trussell, an analyst at Deutsche Bank, wrote in a note. “That conservatism may limit stock appreciation in the near-term, but we believe over the medium- to long-term, Lulu’s unique growth profile will drive a much higher share price.”
In fact, while the company did not provide any formal go-forward guidance, executives on Thursday evening’s conference call with analysts said they expect in-store traffic during the fourth quarter — the all-important holiday shopping season — to be about 70 percent of last year’s levels, the same level as the third quarter’s non-peak shopping weeks.
“We currently have approximately 97 percent of our stores open across the globe, in line with Q3,” Meghan Frank, Lululemon’s chief financial officer, said on the call. “However, as we’re seeing a resurgence of COVID-19 in several markets, we’ve experienced a higher number of government-mandated capacity restrictions in November and December relative to Q3. Given our historically high levels of productivity, particularly during the holiday season, these constraints clearly limit the number of guests who can enter our stores at any given time.”
Jay Sole, an analyst at UBS, added that the over-saturation of athletic apparel might cause headwinds for activewear companies post pandemic.
“Recent softlines stock price appreciation suggests the market is very enthusiastic about vaccines catalyzing a strong apparel industry sales rebound next year,” Sole wrote in a note. “A pivotal question around Lulu is if it is a ‘reopening’ trade stock or not? Conventional wisdom suggests companies [that] suffered this year because they sell out-of-favor categories, such as workwear or event wear, will bounce back strongly next year as consumers return to offices, parties, concerts, etc. The issue is [that] this could imply tough [second half of 2021] compares for companies selling items that have been in-favor this year, such as ath-leisure [and] athleticwear. If so, Lulu’s growth rate could unexpectedly slow. We think this would be bad for the stock.”
His firm rated the stock “neutral.”
Simeon Siegel, managing director and senior retail analyst at BMO Capital Markets, point out that while Lululemon continues to grow, it’s still a small player amid the likes of sportswear giants Nike, Adidas and Under Armour.
“Unsurprisingly, Lulu reported a broad-based beat to published estimates this evening,” Siegel wrote in a note. “Lulu revenue growth sits in the top 15 percent of our coverage this earnings cycle and we expect ongoing fundamental strength (with likely conservative guidance), and as we lap this past year’s earlier pressure. That said, at $50 billion market cap with revenues not yet at $5 billion, it seems hard to argue this isn’t well understood.
“Although Lulu drove more sales, this season many retailers were able to drive more profitable sales,” he added. “Lulu is a powerful brand that is priced for more than perfection and a tempered guide for the holiday is likely weighing on shares.”
That may have been enough to convince investors to trade.
Still, Calvin McDonald, chief executive officer of Lululemon, offered some positive feedback during the call. That includes record e-commerce sales during the current-quarter Black Friday shopping season and strong online shopping trends (up 160 percent year-over-year in Europe) last quarter.
Analysts, at least, are bullish on the stock.
“While investors may pick at Lulu’s likely conservative mid-high teens sales growth outlook with store productivity at 70 percent (versus prior [year] 75 percent) and digital moderating from Q3’s [positive] 93 percent, we expect some conservatism is prudent considering rising restrictions [and coronavirus] case counts,” Kate Fitzsimons, an analyst at RBC Capital Markets, wrote in a note. “To that effect, we note Lulu’s historic tendency to guide conservatively, particularly given the backdrop. We remain buyers of Lulu given stronger near-term digital growth, confidence in growth levers multi-year including e-commerce, international, men’s and now Mirror.”
Her firm rated the stock “outperform” and set a price target of $435.
Camilo Lyon, an analyst at BTIG, added that Lululemon’s seasonal pop-up strategy — expected to expand to about 100 locations for the holidays — also helps capture some of the in-person shopping lost from malls that have reached capacity or are closed.
His firm rated the stock a “buy” and set a price target of $449.
“While we expect COVID-19 to materially impact the retail industry, we believe Lulu is well-positioned to weather the current crisis from both a liquidity perspective and a brand perspective,” Lyon wrote in a note. “We believe Lulu is among the few companies that entered the current environment from a position of strength and as such, will exit it stronger. In addition, we believe Lulu is a beneficiary of consumers continuing to spend on at-home exercise [and] workout-related activities in the current COVID-19 environment.”