Lululemon Athletica Today
Lululemon Athletica
- 52-Week Range
- $226.01
▼
$423.32
- P/E Ratio
- 19.06
- Price Target
- $342.61
The retail sector is undoubtedly one of the most affected areas of the stock market today, especially as the uncertainty of trade tariffs keeps hitting the market from every direction. This uncertainty has made it difficult for companies to accurately forecast their earnings guidance since knowing where costs might end up can significantly derail financial models moving forward.
However, this is precisely where opportunities come into play for investors, as the market will directly showcase this uncertainty in stock prices and valuations overall. The opportunity comes not only from the discounts that will become apparent but mainly from the fact that the market can easily fall into a pessimistic state by overshooting the level of discounts that should be applied to stocks.
Due to that very nature of the markets, shares of Lululemon Athletica Inc. NASDAQ: LULU could be in play today, as a recent earnings announcement has amplified this uncertainty in the retail sector further.
Now, investors may raise the question of whether today’s price in Lululemon accurately represents these uncertainties or whether there could be more downside to be had before they consider buying.
Lululemon’s Selloff: Overdone or Justified?
Lululemon Athletica Stock Forecast Today
$342.61
29.15% UpsideModerate Buy
Based on 30 Analyst Ratings
| Current Price | $265.27 |
|---|---|
| High Forecast | $500.00 |
| Average Forecast | $342.61 |
| Low Forecast | $200.00 |
Lululemon Athletica Stock Forecast Details
After reporting its most recent quarterly earnings results, Lululemon stock declined by 18% to end the trading week on a big bearish note. Keeping into account the fact that the stock had already gone on a 30.6% decline on a year-to-date basis, the question remains as to whether this recent drop was necessary after all.
The only way to answer this is by examining the financials in the recent quarter’s results themselves. For starters, net revenues increased by 7% compared to the same quarter last year, driven mainly by Chinese sales growth. This is an unexpected factor considering that trade tariffs have targeted China above most other nations.
Regarding other international revenue, this growth rate appears to be more like 16%, again raising the question of why the market reacted so negatively to the results. Negativity is also not evident in the reported margins, considering that gross profit margins increased by 0.6% over the year without reflecting any cost increases or uncertainty.
All told, Lululemon reported up to $2.60 in earnings per share (EPS), up from last year as well. Management is also expecting high single-digit revenue growth for the next quarter despite trade tariff uncertainty still being in full swing.
The answer lies in the cash flow statement and the narrative of risk it may give to savvy market investors.
A Risk in Lululemon’s Business Arises
When examining the cash flow statement, investors can notice a significant swing in net operating cash flows compared to the same quarter last year. Lululemon reported a net outflow of $118.9 million this quarter compared to a net cash flow of $127.5 million for the same quarter last year.
The biggest driver behind this change is the level of inventory investment the company undertook during the quarter, reaching $174.3 million compared to the typical $35 million. This might be the case because Lululemon management was looking to front-run the potential increased costs in raw materials from tariffs coming up.
While this strategy is sound and rooted in risk management for the financials in the next quarter, it also poses a major uncertainty for investors. What if tariffs aren’t, in fact, as harsh as the market is pricing today?
Then Lululemon would be sitting on nearly six times more inventory than usual, the inventory they will not be able to mark up and will rather have to take a hit on.
A hit could mean a major EPS disappointment in the future, directly affecting the stock’s valuation. However, considering the stock now trades at 63% of its 52-week high, with a near 20% decline following the earnings results, investors can assume that this “worst-case” scenario may be mostly priced in now.
Of course, this uncertainty can’t be fully priced since there is no way to know what tariff impacts will be on this larger-than-usual inventory for the coming months and how that will affect the company’s margins and bottom-line EPS.
Despite all of this uncertainty, investors can also assume that the risk-to-reward ratio in Lululemon favors them by a large margin. Considering that there is little room left to move lower, focusing on the upside potential really brings the setup home, as evidenced by Bank of America analyst Lorraine Hutchinson’s decision to maintain her Buy rating on the stock.
A Buy rating came along with a $370 per share valuation the day after Lululemon reported these figures, meaning the overall sentiment is still bullish for the company at this low price. Now, investors can see that the implied 40% upside makes any single-digit percentage downside look like a great proposition today.
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