Can Lululemon’s share price maintain its composure?

Lululemon Athletica’s [LULU] share price has had an active 2020, growing 58.97% year-to-date to close at $371.07 on 8 December. Lululemon’s share price made modest gains through the opening months of the year before the coronavirus pandemic prompted a temporary fold to $128.85 on 18 March. Lululemon’s share price has since staged a strong recovery, beating its previous all-time-high on 21 May and achieving $399.90, its highest price to date, on 2 September.

In the two months since that high, however, Lululemon’s share price has lost 7.2% of its value (as of 8 December’s close). While the stock has been rising steadily since mid-November, investors will hope for a strong third quarter earnings — due 10 December — to keep Lululemon’s share price flowing in the right direction.

Posing questions

The pandemic has posed a new set of challenges for businesses in all sectors, and Lululemon’s share price has not escaped the uncertainty. Retail has been hit especially hard as consumers have been kept at home thanks to global lockdowns. Only those able to pivot successfully to ecommerce have prospered.

Calvin McDonald, CEO of Lululemon, puts in-person shopping at the heart of the business. The company has recently trialled a range of new in-store offerings to foster loyalty in its community of followers, including experiential stores with on-site cafés and subscriber-only classes. McDonald has banked on retaining goodwill with landlords, continuing to pay them in full throughout the pandemic, in the hope that Lululemon will be well-placed to expand into prime retail real estate as other stores are forced to close.

This approach, however, has dented profitability throughout 2020 as Lululemon continues to open new stores worldwide, despite its in-store trade generating lower margins than its digital business. This hit Q2’s results, which saw earnings fall over 30% year-on-year, and is likely to impact this quarter’s profits, too. For the short-term, however, a 155% increase in online sales more than compensated for the in-store shortfall, powered by increased demand for comfortable, fashionable leisurewear.

Whether physical stores reopen sooner or later, and however successful their eventual resurgence, steps have been taken at a strategic level to diversify Lululemon’s business. The company’s acquisition, in July, of at-home fitness company Mirror brings a significant opportunity for Lululemon to lead the way, not just in fitness but also in a world of omnichannel, on-demand retail that could outlive the pandemic, Chris Walton wrote in Forbes.

Investors will hope that this diversification means Lululemon’s share price prospects are good regardless of the speed and efficacy with which potential vaccines are rolled out.

Stretching sales

According to Zacks Equity Research, this could prove a bumper quarter for Lululemon’s sales. Its consensus estimate put total sales at $1.01bn. If correct, it would be the first time Lululemon has topped the $1bn mark outside of Q4, and would represent a 10.19% increase year-over-year.

While the low estimate of $987.50m is substantially less, it would still represent a 7.8% year-over-year increase and a 9.4% increase on the previous quarter’s figure of $902.94m.

Thanks to Lululemon’s strategy of continuing to invest in physical stores, which are currently generating low returns, profitability is set to fall year-over-year, with the consensus estimate from Zacks Equity Research predicting earnings per share (EPS) to fall 11.5% from $0.96 to $0.85.

While even the most optimistic forecasts put EPS at $0.92, the likelihood is that earnings will improve on last quarter’s figure of $0.74 per share, with the low estimate for the current quarter coming in at $0.80 per share.

Performance predictions

Paul Trussell, analyst with Deutsche Bank, upgraded Lululemon from a Hold to a Buy rating and raised his target for Lululemon’s share price from $298 to $396 at the end of October.

“Athleisure/casual wear remains the most relevant trend in apparel, and Lululemon is leading the way in terms of share gains,” he wrote in a note to investors.

The market, on the whole, agrees. Of 35 analysts polled by CNN Money, 22 analysts rated the stock a Buy. One analyst gave Lululemon an Outperform rating and 11 rated it a Hold, with just one giving Lululemon a negative rating (Sell).

This pessimism may not be widespread, but it appears to be severe. The low target among 31 analysts offering 12-month price forecasts was $228, a 38.5% downside on 8 December’s close, while the high target of $450 is 21.3% above the latest price. The median price target of $400 would represent a 7.8% increase on Lululemon’s share price as of close on 8 December.