Lululemon Earnings Preview

Athleisure did well during the stay-at-home period, but valuations became an issue for Lululemon. Are the shares back to an area of value ahead of earnings?

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Looking for a rebound

Lululemon's share price peaked in early November, after its last earnings report. With a P/E ratio over 48, and not paying a dividend, the company's shares are much more sensitive to interest rates. So, as the reality of the Fed raising rates set in over the last quarter, a readjustment in the company's stock price was expected.

But Lululemon in particular is also vulnerable to higher prices since it's at the top of the range when it comes to athleisure. Although the company hasn't commented on it so far (and that might be an issue that could be addressed at the coming earnings presentation) it's reasonable to think that an already pricy product would have trouble passing on price hikes to more budget-conscious consumers. On the flipside, if management think they have the pricing power to pull off price hikes, this might be the bullish catalyst the stock needs following a steep sell-off.

Earnings guidance

In January, the company cut guidance to the lower end of its expected EPS range of $3.25-3.32 due to staff shortages from the surge in omicron. While the firm did really well during the pandemic because of its online focus, clearly it is still vulnerable to what's going on in physical stores. The consensus among analysts is that it will post earnings of $3.27, a 30% increase over the prior year. That is a slowing of the growth pace, however.

The focus is likely to be on comments about Lululemon's incursion into the sneaker market, which is already relatively crowded. Future rival Adidas, for example, has had trouble offloading its Reebok brand.

Trouble ahead

The other focus would be Mirror, where the company cut the outlook last quarter. Rival Peloton has been struggling in this space, and Nike sued Lululemon over patent infringement early this year. Only 3% of the company's revenue comes from this unit, so underperformance isn't a problem. But investors could get really worried if management commits to investing substantial amounts of capital in the venture.

LULULEMON is still in a bear market

LULULEMON came into a bear market in February, but after falling to a yearly low on March 15 it has made hopeful gains. It trades above its 200-week average and it’s February 2021 low, but it has to sustain its position for a chance at $380 - its 200-day equivalent.

Immediate resistance can be observed at $330, and then $350. Inversely, support lies at the round $300, and below that, $270.

Source: Spreadex trading platform

Key takeaways

Lululemon investors must focus on the company’s susceptibility to higher prices as interest rates rise. Consumer appetite might change as inflation starts to bite. Investors should be particularly interested in how the company is planning to increase its sneaker's market share and whether investing in Mirror eats up a substantial amount of the firm’s capital.