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Buy Lululemon Stock Down 20% Before Earnings for Big Growth Upside?

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Lululemon (LULU - Free Report) stock is on a huge run over the past five years, up 400% to blow away the apparel market’s 70%, Nike’s (NKE - Free Report) 120%, and the benchmark index’s 100% climb. The athleisure standout turned sportswear powerhouse was soaring in 2020 as well, as Wall Street praised its ability to grow its e-commerce business amid the stay-at-home economy.

Lululemon shares have, however, fallen over 20% since early September as investors have been underwhelmed by its guidance. Yet the company’s growth outlook and fundamentals remain strong, which means investors might want to consider the beaten-down stock heading into its fourth quarter fiscal 2020 financial release on Tuesday, March 30.

New Dress Codes…

Lululemon has expanded from niche high-end yoga-focused clothing firm in the late 1990s to global apparel giant. Today the company sells an array of athletic apparel for both women and men, alongside clothing that can be worn to work, on dates, at the golf course, and beyond. LULU’s successful athleisure business has slowly helped changed the way many people dress, and office attire was already becoming more relaxed long before the pandemic.

The Canadian company’s success has forced everyone from Gap (GPS - Free Report) to Target (TGT - Free Report) to start their own athleisure brands. LULU has also pushed further into outwear to challenge Canada Goose (GOOS - Free Report) and The North Face (VFC - Free Report) , and others.

More recently, LULU has rolled out self-care products. And last June it announced its purchase of digital-focused at-home fitness company Mirror. The acquisition helps the firm expand into a hot growth category, alongside Peloton (PTON - Free Report) and others.

What Else…

Lululemon has always focused on direct-to-consumer business through its own stand-alone stores and e-commerce. This model has paid off and will continue to be beneficial as many department stores struggle to adapt to changing shopping habits and fading malls.

The company closed Q3 with a total of 515 company-operated stores—a majority of which are located in North America—up from 479 in the year-ago period. LULU executives are focused on growing in Asia and elsewhere, and it has introduced experiential stores that include yoga studios and cafes.

All of these efforts have helped LULU’s annual revenue grow by an average of 17% in the past five years, including 24% expansion in FY18 and 21% growth last year. With this in mind, its first quarter FY20 revenue fell 17%, as its stores were forced to close in the early days of the coronavirus.

Luckily, its e-commerce business was able to carry some of the load and it posted 22% top-line growth last quarter. The company also topped our Q3 EPS (period ended on November 1, 2020) estimate by 33%. And its DTC revenue soared 94% to push its e-commerce revenue to 43% of total sales, up from 27% in the prior-year quarter.

As we mentioned at the outset, LULU is up 400% in the past five years to crush Nike, Adidas (ADDYY - Free Report) , and even Apple (AAPL - Free Report) . The stock has cooled down recently, underperforming the market in the last six months, which is likely healthy given its run.

Lululemon closed regular hours Wednesday at $307 a share, down roughly 22% from its early September records. Investors should note that LULU is trading below both its 50 and 200-day moving averages, a place it has rarely stayed for long before.

The stock has popped since it fell into oversold territory on March 8, when the Nasdaq entered a correction. But at 45 in terms of RSI it still sits below neutral levels of 50, which could give it room to run. The recent downturn has also improved its valuation picture, trading 15% below its own one-year median at 7.4X forward sales.

Bottom Line

Zacks estimates call for LULU’s Q4 revenue to climb 19% to $1.66 billion to help lift its adjusted earnings by 9%. Despite its big Q1 drop, the company’s full-year revenue is still projected to climb by 9% to reach $4.33 billion.

Jumping ahead to FY21, the sportswear firm’s sales are expected to surge by 25% to $5.41 billion, for its best top-line expansion since FY13. Meanwhile, its adjusted earnings are projected to climb by 45% to $6.65 a share in 2021.

Lululemon lands a Zacks Rank #3 (Hold) right now and it has seen some positive earnings revisions in the last seven days. And 16 of the 26 broker recommendations Zacks has are “Strong Buys,” with none below a “Hold.” Longer-term investors might want to think about buying LULU stock down 20% from its highs, even if it faces more selling pressure or underwhelms Wall Street on March 30.

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