Last year was something of a bumpy road for Netflix’s [NFLX] share price. Althululemon’s [LULU] share price sprinted to a near-50% gain in 2020. Helping deliver such a stellar performance was the shift to working at home, as office staff ditched more formal wear for hoodies and sweatpants.
The holiday season saw a strong performance from the Canadian athletic apparel retailer. In a press release, Lululemon said it now expects fourth quarter results to come in at the top end of forecasts, with net revenue in the mid- to high-teens, along with mid-single digit gains for earnings per share.
“We’re pleased with the momentum over the holiday period as our investments in lululemon and MIRROR allowed us to connect with guests both physically and digitally,” Calvin McDonald, CEO, said in the statement.
However, there are concerns that Lululemon’s share price is overvalued, although one analyst has pinned a $500 price target on the stock. Could the retailer really hit this mark and what does the latest revision mean for the stock?
How did Lululemon’s share price react?
Lululemon’s strength over the holidays is in contrast with the wider retail sector, particularly in the US where sales contracted 0.7% in December. Yet, despite the earnings revision, Lululemon’s share price dropped following the announcement, with BMO Capital Markets analyst Simeon Siegel telling CNBC“investors expected a beat, not a pause.”
Lululemon’s fourth quarter results are due in March and come after a strong third quarter. In Q3 the retailer posted sales of $1.1bn, up 22% from the same period last year, and beating the expected $1.02bn. Earnings in the third quarter came in at $1.16 per share, beating a forecast $0.88 per share. Direct to consumer revenue — i.e. sales made without a middleman involved — jumped 94%, to make up 42.8% of total revenue, pointing to the strength of both Lululemon’s retail stores and its e-commerce offering.
“While a V-shaped recovery may not be materializing for most of apparel retail, Lululemon has bounced back from the weak start to its year with a stunning set of third-quarter numbers,” commented GlobalData’s Neil Saunders to CNBC.
As it stands, Wall Street expects the apparel retailer to post earnings of $2.49 a share for the fourth quarter, up from the $2.28 seen in the same period last year. Revenue is pegged at $1.66bn, a 19.1% increase on last year. If the retailer can top expectations, then Lululemon’s share price could gain post earnings.
Is Lululemon’s share price overvalued?
One concern for investors is that Lululemon’s share price trades at a 49.75X forward price to earnings ratio, suggesting the stock is trading at a premium and is potentially overvalued.
Deutsche Bank analyst Paul Trussell doesn’t think this is too much of a problem, having upgraded Lululemon from hold to buy in October. In his analysis, Trussell suggests that, while the stock’s valuation isn’t cheap, Lululemon was likely to outperform the retail sector and had a “strong margin recovery over the upcoming quarters.” Trussell also upped his price target from $298 per share to $396 — a 14.9% upside on 15 January’s close.
Raymond James analyst Matthew McClintock is more bullish on Lululemon’s share price. In December, the analyst maintained his strong buy rating on the stock while upping his price target from $400 to $500 — a Wall Street high.
According to Seeking Alpha, McClintock reckons that other than Lululemon’s pricey valuation it was hard to think of any major challenge to the firm, with the stock one of McClintock’s long-term ideas for 2021.
“Ultimately, the real differentiating factor here is that LULU currently enjoys the benefit of a virtual monopoly amongst major brands in the Athletic Apparel industry simply because its core heritage derives from apparel, its distribution model is superior to all major competitors, and all innovation/merchandising efforts are entirely focused on apparel rather than split with footwear,” McClintock wrote in a note to investors.
While McClintock’s price target might seem optimistic, analysts generally think Lululemon’s share price still has potential. Among those tracking the stock on Yahoo Finance, Lululemon’s share price carries an average target of $405.17. Hitting this would represent a 17.6% upside on the current price (through 15 January’s close). Of the 35 analysts offering recommendations, seven rate Lululemon a strong buy and 11 a buy.
Whether Lululemon’s share price can hit the $500 mark seems to depend largely on strong fourth quarter results come March.
Source: This content has been produced by Opto trading intelligence for Century Financial and was originally published on cmcmarkets.com/en-gb/opto