Lululemon Stock Up 7% Today – Time to Buy LULU Stock?

The price of Lululemon stock is up 7% this morning in pre-market stock trading action following the release of the company’s financial results covering the fourth quarter and entire 2021 fiscal year.

For the three months ended on 30 January, Lululemon reported net revenues of $2.1 billion resulting in a 23% year-on-year increase with international sales spearheading this uptick as they advanced 35% compared to a year ago. Analysts were expecting sales of $2.13 billion for the quarter.

Comparable store sales were up 32% during the period while direct-to-consumer (online) sales increased by 16% on a constant currency basis. A total of 22 net new stores were opened during the quarter for a total of 574 currently active stores.

Gross margins during the quarter decreased 50 basis points at 58.1% but operating margins increased 120 basis points to 27.7% while they also rose 90 basis points on an adjusted basis at 27.8%

Lululemon’s earnings per share ended at $3.36 resulting in a 33.3% jump compared to Q4 2020 while the firm’s adjusted EPS landed at $3.37 versus $2.58 reported by the firm the previous year. Analysts were looking for adjusted EPS of $3.27 for the period.

Compared to pre-pandemic levels, sales in 2021 jumped at a compounded annual growth rate of 25% while gross margins improved by 180 basis points. Meanwhile, operating margins increased by 100 basis points and 30 basis points on an adjusted basis.

The Board of Directors of Lululemon approved a $1 billion share buyback program after completing a previous authorization during the first fiscal quarter of 2022.

For the first quarter of 2022, the management expects to report revenues of up to $1.55 billion and earnings per share of up to $1.43. Meanwhile, for the entire 2022 fiscal year, revenues are expected to land between $7.49 and $7.62 billion while earnings per share are expected to land between $9.15 and $9.35 per share. This first-quarter guidance exceeded analysts’ estimates for the period.

What could be expected from this fitness stock following the release of this strong quarterly report? In this article, I will be assessing the price action and fundamentals of Lululemon stock to outline plausible scenarios for the future.

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Lululemon Stock – Technical Analysis

Shares of Lululemon are accumulating a 12.1% loss so far since the year started as a shift in macroeconomic conditions along with concerns related to geopolitical tensions and supply bottlenecks weighed on the valuation of this athletic apparel manufacturer.

If today’s pre-market uptick materializes during the live session, LULU’s performance will be a step closer to turning positive this year.

The chart above shows that the latest price action may have fully reversed the November downtrend already as the price made a higher high yesterday and may continue to rise today.

That said, Lululemon still has to overcome the 200-day simple moving average for a full-blown bullish outlook to be confirmed.

Momentum indicators are on an uptrend for the first time since November with the Relative Strength Index (RSI) standing at 64 (bullish) while the MACD just moved to positive territory shortly after crossing above the signal line. Histogram readings have also been steadily increasing in the past few days.

Moving forward, the 200-day simple moving average remains an important threshold that LULU must overcome to keep rising. If that resistance is tagged, the short-term upside potential based on yesterday’s closing price would stand at 11.5%.

Lululemon Stock – Fundamental Analysis

Today’s report from Lululemon was quite strong as it exceeded analysts’ estimates for both the current and the upcoming three months. The $1 billion buyback program is also good news and the company may start to execute it right away by taking advantage of the current low price.

Another positive aspect is that profit margins have not suffered despite the supply chain crisis and that shows the management’s ability to overcome these challenges.

Based on LULU’s 2022 earnings guidance, Lululemon is trading at a forward price-to-earnings ratio of 37x. From 2017 to 2020, normalized diluted earnings per share have grown at a compounded annual growth rate of 30.6%. Meanwhile, if the firm hits its forecasted adjusted EPS for 2022 that would result in a 20% year-on-year jump.

It is important to note that, aside from the firm’s lease liabilities, Lululemon has no long-term debt and reported total assets of $4.94 billion including $1.26 billion in cash and equivalents.

Additionally, the company produced free cash flows of almost $1 billion resulting in an FCF margin of approximately 16%. If that margin is maintained in 2022, the company will produce around $1.2 billion in free cash flows resulting in a forward P/FCF ratio of 37x.

At current levels, the company seems to be fairly valued meaning that any upside potential will largely depend on how market sentiment evolves in the following quarters. With this in mind, even though its fundamentals are strong, investors may have to wait a while for the stock to keep climbing as multiple variables are still threatening to keep the performance of equities relatively capped.

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