Home Finance Why Has Lululemon Stock Been Dropping And Will It Rebound? – Seeking Alpha

Why Has Lululemon Stock Been Dropping And Will It Rebound? – Seeking Alpha

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Why Has Lululemon Stock Been Dropping And Will It Rebound? – Seeking Alpha

Robert Way/iStock Editorial via Getty Images
I maintain my Hold investment rating for Lululemon Athletica Inc.’s (LULU) shares. I reviewed LULU’s Q2 2021 earnings in my previous article published on September 16, 2021.
The recent drop in LULU’s share price is understandable, considering that its fourth-quarter financial performance has been negatively affected by the Omicron variant. Looking ahead, I don’t see a substantial rebound for Lululemon’s share price in the short term, as its forward P/E valuations remain demanding notwithstanding the recent share price correction.
LULU’s stock price reached a historical high of $485.83 during intraday trading on November 16, 2021, and its last traded share price of $330.35 as of February 3, 2022 represents a -32% drop from the peak in the past two and a half months.
The World Health Organization or WHO announced in a November 28, 2021 media release that it had already “designated the variant B.1.1.529 a variant of concern, named Omicron.” This was followed by a December 9, 2021 Reuters article that Lululemon had cautioned that “the pandemic worsening due to COVID-19 variants could further impact supply chain issues and lead to temporary closures of some or all of its stores.” In other words, there were concerns about the potential negative impact of the spread of the Omicron variant of COVID-19 on LULU since late-November and early-December 2021.
The worst fears were confirmed when Lululemon issued a press release on January 10, 2022. In the press release, Lululemon disclosed that the company’s Q4 2021 revenue and earnings per share are expected to come in “toward the low end of its” earlier guidance, which LULU attributed to the “Omicron variant.”
I go into more details of LULU’s expectations for its Q4 2021 financial performance in the next section.
Lululemon is expected to formally announce the company’s fourth-quarter earnings towards the end of March 2022 as it did last year. But LULU’s January 10, 2022 press release gives investors an early indication of how the company is doing financially in the most recent quarter.
Specifically, LULU sees the company’s Q4 2021 revenue “toward the low end of” $2.125 billion-$2.165 billion, while it anticipates that its non-GAAP adjusted earnings per share should be “toward the low end of” the $3.25-$3.32 range. Lululemon highlighted in its January 10, 2022 media release that Omicron headwinds likely “increased capacity constraints, more limited staff availability, and reduced operating hours in certain locations” were responsible for Lululemon’s relatively more modest financial expectations for the fourth quarter of fiscal 2021.
Assuming that Lululemon’s actual Q4 2021 revenue and earnings per share were $2.125 billion and $3.25, respectively, the company would have delivered a +22.9% YoY increase in its topline and a +26.0% YoY expansion for its bottom line in the most recent quarter. In comparison, the sell-side analysts’ consensus revenue and earnings per share growth estimates for LULU on a YoY basis in the fourth quarter of 2021 were +25.5% YoY and +29.5% YoY, respectively prior to the January 10, 2022 media release according to S&P Capital IQ.
This suggests that Lululemon’s updated Q4 2021 financial outlook as per the press release issued last month fell short of market expectations, which explains LULU’s share price weakness.
I think Lululemon stock will not rebound significantly in the short term, but a further sell-down after the actual Q4 2021 results announcement in late-March 2022 is also unlikely.
On one hand, there are positive expectations that LULU has already seen the worst of the negative effects of the Omicron variant on its business operations, based on the conversations between the company management and investors at the ICR Conference held between January 10 and January 12 this year.
A January 10, 2022 Seeking Alpha news article cited a BTIG sell-side research report which highlighted that LULU’s “traffic has already started rebounding as the worst of Omicron infections appears to have peaked” based on the company’s “guidance update at the ICR Conference.” Separately, a JPMorgan (JPM) analyst report (not publicly available) titled “ICR Mgmt Meeting Takes & Multi-Year Model Implications” published on January 11, 2022 noted that there was a “sequential improvement” in “physical store traffic” for LULU in the “January-to-date” period.
Notably, Lululemon’s fiscal year ends on January 31, so the company’s fourth quarter of 2021 is referring to the financial period between November 1, 2021 and January 31, 2022. Based on Lululemon’s comments at the ICR conference as cited by Wall Street analysts, a recovery in store traffic for January 2022 is very likely. This means that LULU’s actual Q4 2021 financial results could be slightly better than its financial outlook as per its January 10, 2022 media release. In other words, negative surprises following Lululemon’s fourth-quarter earnings announcement in March 2021 are less probable.
On the other hand, LULU’s rich valuations might cap the potential upside associated with any share price recovery in the short term. According to financial data sourced from S&P Capital IQ, the market values Lululemon at 39.6 times consensus forward next twelve months’ P/E.
It is noteworthy that the market consensus expects LULU’s topline expansion to slow from +42.3% in FY 2021 (fiscal year ended January 31, 2022) to +15.9% and +14.8% for FY 2022 and FY 2023, respectively. I don’t think that there is room for further valuation multiple expansion in the case of Lululemon, taking into account expectations of a mid-teens percentage revenue growth going forward.
In summary, LULU’s shares should not see another major sell-down since store traffic for the company has already seen signs of recovery in early January 2022. On the flip side, a substantial stock price rebound for Lululemon is not likely given a mismatch between its lofty forward P/E multiple and its relatively modest revenue growth expectations.
LULU stock is a Hold.
In my prior September 16, 2021 article, I warned that Lululemon’s “valuations are expensive, and an earnings miss in the future could de-rate its shares.” In the last few months, LULU has experienced a significant share price correction due to concerns about the Omicron variant which were subsequently validated by its updated financial outlook for the fourth quarter of 2021 that failed to meet market expectations.
I have decided to retain a Hold investment rating for LULU, as I expect the company’s shares to stay range-bound in the near future.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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