Lululemon Can Support Its Share Price

Lululemon Athletica (NASDAQ:LULU) has recently retreated from all-time highs, and the shares are near 2020 highs set about a year ago. The company reports FQ2 earnings after the market closes on Sept. 8. LULU closed at $391.16 on Sept. 1, 2020, after which the shares started a decline. The company reported FQ2 2020 results on Sept. 8, beating expectations on EPS and revenue, but the shares continued to fall, closing below $300 on Sept. 18. The shares spent much of the past year below $350, but rallied to close at a YTD high of $414.52 on Aug. 30. That run in share prices was triggered by strong FQ4 results (reported on Mar. 30).The shares are currently trading at around $390.

Looking at trailing returns for various time horizons tells an interesting story. For the 12-month period through Sept. 3, the shares have gained 2.77%, as compared to 35.4% for the retail apparel industry and 35.1% for the US equity market as a whole. Over the trailing 3- and 5-year periods, however, LULU has annualized return that is far higher than either the retail apparel industry or the market as a whole.

Source: Trailing returns for LULU vs. the Retail Apparel industry and the U.S. stock market as a whole.

LULU has a forward P/E of 57.1, far higher than Under Armour (NYSE:UA), which has a forward P/E of 36.2, and Nike (NYSE:NKE), with a forward P/E of 38.5. The question is whether the market thinks LULU’s share price has gotten too far ahead of earnings expectations for the near term or whether there is a broader revaluation going on. The valuation for a stock at this high a P/E is sensitive to variations in the expectations for earnings growth.

To formulate an opinion on LULU, I rely on two forms of consensus outlooks. The first is the Wall Street analyst consensus. When there is reasonable agreement between the analysts, the consensus price target has predictive value. The second form of consensus is the market-implied outlook, a probabilistic outlook for price returns derived by analyzing the prices of call and put options on the stock. The price of an option represents traders’ consensus estimate for the probability that the price of LULU will move above (call option) or fall below (put option) a specific level (the strike price) between now and when the option expires. By analyzing call and put option prices at a range of strikes and a common expiration, it is possible to infer the probabilities for future returns than reconcile the options prices. For readers who are unfamiliar with this concept, I have written an overview post, including links to the relevant financial literature.

Wall Street Consensus Outlook for LULU

eTrade’s calculation of the Wall Street consensus combines the views of 9 ranked analysts who have issued opinions within the past 90 days. The consensus rating for LULU is bullish and the consensus 12-month price target is 13.56% above the current price. Even the lowest of the price targets is 4.3% above the current price.

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