Lululemon (NASDAQ: LULU), one of the world’s most-loved yoga-gear retailers, is bobbing and weaving the viruses punches as LULU is up 54% YTD. LULU’s earnings are tomorrow, which is causing the bears and bulls to divide. Some analysts adamantly believe LULU’s reputation will see the stock continue to rise into 2021. Whereas the bears are screaming ‘overvalued’ and suggest that average earnings could ignite a sell-off. Despite the polarisation, YIG will break down LULU’s earnings and paint the future outlook for our readers.

Table of contents 
1. Lululemon's earnings sentiment 
2. Will LULU be bullish or bearish after earnings? 
3. YIG's takeaway on a Lululemon investment post-earnings.

LULU earnings expectations

Wall Street remains somewhat optimistic ahead of LULU’s earnings and beyond. The bullish consensus comes from nine institutions raising their Lululemon price targets, the lack of sell-ratings, and the digital revolution.

However, bullish Lululemon analysts do have critics. For example, investment bank Citi Group downgraded its LULU rating from a buy to a neutral. Primarily, as Citi heard overvaluation alarm bells ringing as the institutions all raised their target prices. Moreover, analyst Paul Lejuez downgraded his rating from buy to neutral. Lejuez also agrees with the LULU inflation argument. Especially as Lejuez stated, “we have to ask ourselves if we can realistically recommend buying Lululemon at $400… and we just can’t do it.” Both neutral ratings are not bearish for the bigger picture. However, the downgrades are bearish for short-term earnings investors. Because the overvaluation will likely see LULU stagnate or sell-off in the next few days.

Analysts expect LULU’s EPS to come in at $0.55 and for revenue to be $842.49 million. Looking at the earnings estimate in isolation does not give investors much insight into whether the forecasted financials are significant. However, between May and June 2019, LULU posted an EPS of $0.96 and revenue of $833.35 million . If the consensus estimates hold up, LULU will report a 42.71% and 24.12% fall in EPS and revenue YoY. Ultimately, painting a bearish earnings report. However, LULU’s online sales could be the saving grace for a better than expected earnings (opinion not advice).

Lululemon’s post-earnings

Bullish LULU scenario after Q2 earnings

Despite COVID-19 wreaking havoc on Lululemon’s Q1 financials, the future looks bright for three reasons. First, many investors have a strong, even sentimental bond with Lululemon. Investors saw the benefit of strong customer affiliation, as LULU reported a 70% increase in online sales (June 11th). Lululemon will continue to leverage its brand loyalty online to sustain its high sales volume. Second, the yoga-gear retailer is not just known for yoga-gear. For example, more and more people are now buying self-care products, gym, and business attire form Lululemon. Hence, the one-stop shop vibe and online domination. Lastly, the digital world is growing at a lightning pace, allowing businesses, like Lululemon, to reach more people. However, many retailers, as seen with COVID-19, will be crushed financially. For example, Target. Thus, LULU’s strong brand loyalty, broad product range, and digital  presence should be a vacuum for online sales.

Bearish Lululemon outlook after Q2 earnings

However, the bears exposie the growing recession, the disadvantages of holding inventory, and supply chain disruptions. The fallout of an economic downturn could see investors stray away from the retailer as discretionary income becomes tight. Not to mention a $400 price tag could be expensive for some investors. In which we could see LULU stock-split.

Holding inventory is a contentious issue. Lululemon’s stock is stacking up because of COVID-19. For example, LULU reported a 41% increase in inventory last quarter, and analysts expect another increase this quarter. Lululemon’s executives stress that holding inventory is not concerning at the moment. However, the risks of higher storage costs, insurance premiums should not be brushed under the rug.

Does YIG see value in LULU post earnings?

Before I begin, I am obliged to remind our viewers that this is not advice but rather investment commentary from extensive research

Short answer: All the signs are pointing towards the upside, post-earnings. However, if COVID-19 or the recession intensifies, the growth prospects would fade. (opinion not advice) 

The after-earnings outlook appears bullish. Sure, a recession is a drawback, but you could say that about most companies. Also, LULU’s high sales volumes should fix any concerns around holding inventory. The raising of price targets above $400 should see retail investors follow suit. For example, Citi Group, Telsey Advisory Group, and Royal bank all raised their price targets above $400. All in all, it seems the expected earnings are already priced in. In which low volatility should be the picture through earnings. However, the future is in the hands of the bulls.(opinion not advice)

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The information above is not financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.

Written by Patrick McLoughlin, Senior Manager of YIG.

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