Lululemon Is Still A Buy

About: Lululemon Athletica Inc. (LULU)
by: Bill Gunderson

Lululemon recently beat both their earnings and revenue estimates.

The stock has been one of the best performers in the market over the last one, three, five, and 10 years.

I put out a strong buy recommendation on the stock back in June.

Note: All images, unless otherwise noted, show data from the Best Stocks Now database.

In recent years it has been well documented that LULU stock has been a victor within the retail sector. The athletic wear company has repeatedly demonstrated strong earnings and sales growth. Let's take a look as to why Lululemon it is still a buy.

Lululemon (LULU) reported earnings after the close of the market on Thursday, September 5th with a consensus EPS estimate for the quarter of $0.89 per share (+25.4% Y/Y), while the consensus revenue estimate was $845M (+16.8% Y/Y). Sales came in at $883M, which represents 22% growth in earnings as opposed to the 16.8% expected. Once again, Lululemon turned in an outstanding quarterly report.

LULU has a 100% history of beating quarterly earnings and sales estimates over the last two years. They have kept the win streak alive with a report of $0.96/share in earnings. This beat estimates by $0.07 per share. Year over year earnings growth came in at 35%, which was much better than the expected 25.4%.

The company operates and franchises 440 athletic apparel stores in the U.S., Canada, Australia, UK, and New Zealand. Their focus is on yoga apparel and accessories. This large-cap, Vancouver, British Columbia, based company has now grown to almost $26B in market capitalization and currently has annual sales that are well over $3B. That is a lot of Luon®! Luon® is the primary fabric made of 86% Nylon and 14% Lycra used in most of Lululemon’s products.

I recently wrote an article on June 17, 2019, about LULU stock titled “Lululemon Has Delivered A Lot Of Alpha.” The stock was trading at $170.89. It closed at $203.14 last Friday. The stock continues to deliver alpha.

Additionally, the company’s earnings estimate for the next fiscal year went up $5.48 per share to $5.61. However, it must be noted, the anticipated average earnings growth rate over the next five years remains at 18.4%.

It is no secret LULU has been a big winner historically. Over the last decade, the stock delivered an average annual total return of 34.5% per year. During that same period of time, the S&P 500 has delivered an average annual total return of 11.3% per year. The stock has actually lapped the S&P 500 three times during the last ten years.

When looking at the five-year history, LULU has delivered even greater alpha to its investors While the S&P 500 was averaging a total return of 8.3% per year, they delivered an average total return of 39.3%.

The last 36 months are even better- averaging 44.2% per year, while the S&P 500 is averaging 10.9%.

Twelve months of history shows the stock up 34.5%, while the market is just up 3.5%. Now that is a load of alpha!

Here is what a ten-year chart of the stock currently looks like.

It should be noted that the company does not pay a dividend. Companies usually start paying a dividend when their growth starts to slow down. This is still a pure growth stock. I have it in a moderate risk profile.

My performance grade is based on long-term, intermediate-term, and short-term performance. When I compare these returns on a relative basis against 5,337 other stocks, ETFs, and Mutual Funds in my database, Lululemon earns a performance grade of A+. This is one of the best-performing stocks in the entire market.

My momentum grade is based on the relative stock performance against all other over the last one, three, six, and twelve months. Lululemon currently earns a momentum grade of A. But I do not advise buying stocks on momentum characteristics only. Momentum is just one-half of my equation, while valuation is the other one-half. Momentum looks backward, while valuation looks forward.

Let’s have a look at my new target price on the shares after the company’s recent earnings beat. My target price moves up from June’s price of $341.78 to $372.91. The stock has obviously moved up during my last article also. The stock had a 100% upside potential back then and currently has 83.6% upside potential. I like stocks that have at least 80% upside potential over the next five years. Lululemon still meets my valuation criteria.

One half of my stock selection equation is based on momentum, and the other half is based on valuation, the stock still scores very highly in my relative ranking system. Back in June it was ranked at #36 overall, and I had it at a STRONG BUY. It is currently ranked at #41 overall and now ranked as a BUY. It has come down one notch in my recommendation rating because of valuation. A bit of a pullback in this stock would more than likely get it back to that STRONG BUY category.

Additionally, the stock is currently ranked at #6 overall amongst the Large-Cap category and #6 overall within the consumer stock.


When all is said and done, Lululemon has demonstrate it is still a buy. I was long on the stock back in June. Since then, it has delivered an excellent earnings report that exceeded both earnings and sales estimates, with the company guided even higher for next year.

The momentum remains promising for LULU. In fact, it one of the strongest stocks in the entire market over the short, intermediate, and long-term.

In addition to this, I can still make a valuation case of 83% upside potential over the next five years for the share. I remain long the stock. If you are looking to get in, there should be an inevitable pullback soon that would allow you yet another good entry point.

Disclosure: I am/we are long LULU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I currently own this stock.