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Lululemon Analysts Look Past Soft Q4 Guidance and Raise Price Targets on Athleisure Retailer

Most analysts are confident of the chain's ability to sustain its performance. But as always, look out for the risks.

Lululemon Athletica's third-quarter report was overshadowed by soft fourth-quarter guidance, sending the stock down. But analysts are looking past Q4 and, measured by their price targets, they're even getting more bullish. 

The Vancouver athleisure retailer's stock fell 5.8% to $219.60 a share Thursday after Wednesday's earnings report. 

Lululemon is RealMoney's Stock of the Dy. See all our coverage here.

Earnings per share came in at 96 cents, up 35% from 71 cents in the year-earlier quarter. The latest result beat analysts' estimates of 94 cents, as measured by a FactSet survey.

Total revenue advanced 23% to $916 million, beating Wall Street estimates of $899 million. Comparable sales grew 16%, beating the consensus of 14%. 

Management raised full-year 2019 EPS guidance to a range of $4.75 to $4.78, up from a prior forecast of $4.63 to $4.70. The new range exceeds analysts' expectations of $4.75. 

But the Q4 guide, specifically, came in light at a range between $2.10 and $2.13, against analysts hopes for $2.13. 

Lulu usually posts strong guidance across the board and with the stock up 12.5% in the month leading up to the print, Lulu was put up to a tall task for its earnings report. 

"High expectations cast a shadow on a solid third-quarter beat and raise ," wrote Wedbush Securities analyst Jen Redding in a note. 

But at least six Wall Street analysts raised their price targets. 

Goldman Sachs analyst Alexandra Walvis raised her target to $219 from $193 "on sustained investment driving stronger and longer-dated momentum." 

Walvis raised her 2020 and 2021 EPS estimates to $5.88 and $6.88 from $5.66 and $6.65 and raised her multiple on the next 12 months' earnings to 34 from 32. 

Many say Lulu can sustain its rate of same-store-sales growth, which has trended at above 15% recently, driven very much by strong e-commerce sales. 

Not only did Lulu post 30% e-commerce growth in Q3, but Walvis noted that the company is expanding its buy-online-pick-up-in-store capabilities. "Lastly," she said, "LULU continues to invest in website improvements, including better search and personalization functionality." 

Before the earnings report, Redding raised her price target to $225 "given continued solid performance in a challenging macro environment, owing to strong demand trends and customer loyalty, advanced data analytics." She raised her target multiple on 2020 earnings to 40 times. 

Lulu is also appealing to men better more than in past years, a move that can support comparable-sales growth. Menswear sales grew 38% in the quarter. 

Lulu currently trades at nearly 40 times forward earnings, a multiple that has expanded this year. 

As for the soft fourth-quarter guidance, Walvis called the forecast "conservative." 

But as always, analysts cite a number of risks to their outlooks.

Lululemon will have to watch its inventory levels. Rising inventory at several retailers have recently been a factor causing heavy markdowns and promotions, and Lulu isn't completely sheltered. 

Higher-than-planned inventory levels can prompt merchandise markdowns, Redding said.

She also mentioned "fashion risk," referring to styles and consumer trends that retailers are always keen to capture.

And on a macro level, an escalation in tariffs could pressure Lululemon's margins. 

The company has so far maintained margins through the U.S.-China tariff war, particularly by managing selling, general and administrative expense well.