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Lululemon Athletica and Applied Materials have been highlighted as Zacks Bull and Bear of the Day

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For Immediate Release

Chicago, IL – October 24, 2022 – Zacks Equity Research shares Lululemon Athletica Inc. (LULU - Free Report) as the Bull of the Day and Applied Materials (AMAT - Free Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Cracker Barrel Old Country Store (CBRL - Free Report) and Euroseas Ltd. (ESEA - Free Report) .

Here is a synopsis of all four stocks:

Bull of the Day:

Lululemon Athletica Inc. posted blowout second quarter earnings results in early September and provided upbeat guidance as proves it can successfully navigate higher costs and a slowing economy.

The yoga clothing firm turned sportswear powerhouse's valuation levels are now in line with Nike, yet LULU's growth outlook is far more impressive as it expands its reach and its higher income customers keep on spending.

Investors might want to consider Lululemon at the moment given its top and bottom line growth outlook, valuation levels, and its ongoing drive for expansion through diversification.

From the Gym to the Office & Beyond

Lululemon first made waves in the apparel world through its expensive women's yoga clothing, which is still a part of its business. The company has also evolved into a well-rounded sportswear and apparel company that's helped transform the way countless people dress.

Lululemon sells an array of clothing for both women and men that are fit for the gym, the office, a date night, the golf course, and practically anywhere. Lululemon makes everyday pants, shirts, and tops. LULU's outerwear and jacket segment is growing, alongside its various accessories, and self-care products. The company still sells tons of leggings, athletic shorts, and workout gear as well.

Lululemon has introduced its own women's footwear segment. And one of its newest expansion effort is its very own resale shop that allows users to sell and buy used Lululemon apparel. Other major higher-end brands with loyal consumers such as Patagonia have found success with their own resale sites, as the segment gains traction with online shoppers.  

Outside of clothing and shoes, Lululemon bought digital-focused at-home fitness company Mirror in 2020. The company in early October launched its new Lululemon Studio to pair with its Mirror tech, which starts at $795. The new Studio membership costs $39 per month and requires the Studio Mirror. It allows users to access tons of workout content, along with 10% off Lululemon purchases, and other perks.

Growth and Outlook

Lululemon grew its 2021 sales by 42% to $6.3 billion to help its adjusted earnings by 66%. This growth wasn't artificially boosted by easy comparisons, since LULU posted 11% revenue growth in the pandemic-hit 2020 and it averaged 17% sales growth between FY20 and FY16.

LULU reported strong Q2 results on September 1, with revenue up 29% YoY and comparable sales 23% higher. The company's key direct-to-consumer revenue jumped by 30% and 32% on a constant dollar basis. It is worth noting that a large chunk of its sales still come from North America and the U.S. This is helpful as the strong U.S. dollar hurts many firms that do tons of business outside of the U.S.

Lululemon's gross profit jumped 25% to $1.1 billion, with adjusted earnings 33% higher to help it blow away our Zacks consensus by 18%. The company also provided upbeat guidance for the current quarter as well as for fiscal 2023 to prolong its upward earnings revision momentum. The bottom-line positivity also helps it land a Zacks Rank #1 (Strong Buy) at the moment.

Zacks estimates call for its revenue to surge by 27% in 2022 to hit $7.93 billion and then climb another 15% to $9.1 billion in FY23. Lululemon's adjusted earnings are projected to climb 27% in FY22 and another 16% in 2023 to come in at $11.49 per share.

Wall Street also loves that the firm is committed to expansion. For instance, its so-called Power of Three x2 initiative aims to double its sales from 2021's $6.26 billion to $12.5 billion by 2026. To help achieve this goal LULU executives are aiming to "double men's, double direct to consumer, and quadruple international net revenue relative to 2021."

Other Fundamentals

Lululemon's higher price tags such as $90 shorts and $120 leggings help it post strong margins. Plus, it operates a mainly direct-to-consumer business via its own stores—finished Q2 with 600 locations—and its digital segments to help boost margins further.

The company's high-end prices bring with it higher-income shoppers. This means that its customers aren't feeling the impact of 40-year high inflation as much as many others.

Lululemon is a well-run company that continues to grow its top and bottom lines even as it's forced to navigate plenty of the same obstacles as the wider retail industry. LULU also has a nice balance sheet with nearly $600 million in cash and equivalents and $4.9 billion in total assets vs. $2.06 billion in total liabilities. And it repurchased about $125 million worth of its own stock last quarter even as it funds growth efforts.

In terms of performance, Lululemon stock has soared 360% in the last five years to crush Nike's 64%, its industry, and the S&P 500. LULU is, however, down 10% in the past two years vs. the S&P 500's 6% climb. At around $295 per share, Lululemon trades roughly 40% below its November 2021 records.

The apparel firm's valuation has been recalibrated along with the entire market. And its current P/E ratio is looking rather enticing, with Lululemon trading at a 27% discount to its five-year median and 65% below its highs at 26.6X forward earnings. LULU shares are trading nearly in line with Nike's 25.1X despite LULU's far more impressive growth outlook.

Bottom Line

Wall Street is high on Lululemon, with 67% of the 21 brokerage recommendations Zacks at "Strong Buys," with only one "Sell." Some might be nervous about considering an apparel company stock with the possibility of a significant economic slowdown on the horizon. But Lululemon is bucking many of the current trends by posting big growth and providing upbeat guidance, as it keeps setting the trends in the fashion world. 

Bear of the Day:

Applied Materials shares have tumbled around 50% from their mid-January peaks. The semiconductor equipment firm is suffering as the historically cyclical chip industry faces a slowdown amid a global economic downturn.

Applied Materials on October 12 was also forced to lower its outlook following the U.S. government's new export regulations for U.S. semiconductor technologies sold in China.

Recent Setbacks

Applied Materials is a leading semiconductor equipment maker. The firm boasts that its solutions are "used to produce virtually every new chip and advanced display in the world." AMAT is part of the broader Zacks Semiconductor Equipment - Wafer Fabrication industry that currently sits in the bottom 5% of over 250 Zacks industries.

The supplier of equipment to make semiconductors earlier this year suffered from supply shortages. Now, it is facing broader demand headwinds that are weighing down the entire industry as consumer and business spending slows. Most recently, Applied Materials lowered its Q4 fiscal 2022 (period ending Oct. 30) outlook on the back of fresh U.S. government restrictions.

The U.S. government recently rolled out export regulations for U.S. semiconductor tech sold in China. These efforts include wafer fabrication equipment and related parts and services, which is Applied Materials' core business. The firm said that the new regulations will reduce its Q4 "sales by approximately $400 million, plus or minus $150 million."

The company was also forced to reduce its adjusted earnings guidance to between $1.54 and $1.78 per share down from $1.82 to $2.18 a share. Applied Materials said in a statement that it is "pursuing additional export licenses and authorizations where needed" and that it "expects the new regulations will impact net sales in the first quarter of fiscal 2023 by a similar amount as in the current quarter."

Bottom Line

Analysts raced to lower their guidance for Q4 and FY23 earnings estimates after the China news, with its downbeat EPS revisions helping it land a Zacks Rank #5 (Strong Sell) at the moment.

Applied Materials is still projected to post over 10% higher sales in FY22 and 8% stronger adjusted earnings. The company's adjusted fiscal 2023 earnings are then projected to dip by 6% on 4% lower revenue.

Applied Materials stock popped on Friday alongside the market. Still, the uncertainty of its near-term outlook might be reason enough for caution even if its longer-term prospects remain intact.

That said, the heightened economic tensions between the U.S. and China should give even longer-term investors pause. All told, the most prudent play here might be to wait for Applied Materials to report its Q4 results in mid-November and provide additional updates on the China situation and other fresh guidance.

Additional content:

2 Buy-Ranked Stocks at Attractive Valuations

Earnings season is turning out to be better than expected. But the pessimistic sentiment on the street sees this as a sign that the bad news is just getting pushed out. Companies don't want to commit to any numbers, so they're delaying the process.

The truth is, most companies don't offer specifics more than a quarter out, even in normal circumstances, this early in the day. It's only after the fourth quarter numbers are out that we have the guidance for the following quarter/year.

That's not to say that there is no reason for concern. Nor that it wouldn't have been good to know more about 2023. The supply chain is still snarled after all and the interest rate does keep climbing. For all the effort, inflation doesn't look close to tamed.

With the uncertainty therefore likely to continue, value investing remains the best strategy to tide you over. The idea is to pick cheap stocks that do not reflect their potential because investors are somehow overlooking them. And if there's a dividend going, that's good to have as well.  

In this context, one stock that caught my eye is Cracker Barrel Old Country Store. The Lebanon, Tennessee-based restaurateur is known for its home-style country food, including meatloaves, homemade chicken n' dumplings and its signature biscuits. The restaurants come paired with a retail outlet selling gifts and treats, and household necessities.

This isn't the best of times for a restaurant given the rising inflation, softening demand, a softer than expected summer travel season and considerable uncertainty about the spending environment in general. Cracker Barrel has also seen a decline in its older patrons since the COVID scare.

The reason this company stands out however is the way it has adjusted its pricing strategy and menu design to attract a broader range of visitors while maintaining staff levels. These efforts have hit its margins while allowing it to continue growing its revenue. Cost management, technology investment and a broader customer base are designed to generate continued growth as inflationary pressures ease.

Analysts are clearly buying into this plan, as their 2023 (ending July) estimates are up by 36 cents (5.9%) in the last 30 days. The 2024 estimate is up by an even higher 85 cents, which works out to a 13.0% increase.

The company is not expected to report current quarter results until Nov 22, but its 0.00 earnings Expected Surprise Prediction (ESP) coupled with the Zacks #2 (Buy) rank indicates a fair chance of beating estimates as of now.

Cracker Barrel has Value, Growth and Momentum scores of B, A and A, respectively, which makes them a good pick for almost any kind of investor.

A closer look at the valuation shows that CBRL is trading at a 14.91X multiple of price to forward earnings, which is 3% off its median level this past year and 13.2% off its five-year median.

It also pays a dividend that yields 5.22%.

Second on today's list is Euroseas Ltd., which is in the business of transporting dry and refrigerated containerized cargoes like manufactured products and perishables on vessels that it owns and operates. It is based in Marousi, Greece.

Being a transportation company, Euroseas continues to benefit from the supply chain issues and the record high time charter rates. Even though it isn't immune to the labor issues, COVID constraints and rising energy costs that others are seeing, the high rates and order book sets this company apart.

Therefore, the last quarter was the company's strongest one ever. And although one-year charter rates dropped 10-20% in July and August, they are still at historical highs. With rates staying so high and vessel availability so low, charterers are avoiding contracts of more than three years for now. Broader macro concerns and COVID-related shutdowns (mainly in China) are also playing spoilsport.

Based on the visibility offered by the order book, demand for finished goods is likely to soften in the first half before picking up in the second half of 2023 and remain strong in 2024. One offsetting factor will be new regulations coming into effect in 2023 that will require scrapping of some older vessels, which will limit capacity. Management is confident about growth in the next two years, as well as about returning value to customers through share buybacks and dividends, and about investment in capacity addition.

The strength is reflected in its estimates. Overall, revenue and earnings are expected to grow a respective 100.1% and 156.7% this year followed by 27.5% revenue growth and 31.4% earnings growth in 2023. Earnings estimates for the two years increased 6.6% and 5.4% since it last reported.

The shares carry a Zacks Rank #1 (Strong Buy), which along with the ESP of 0 indicate a beat when the company reports on Nov 15. With both Value and Growth scores at A, the shares are clearly worth buying.

Particularly because they are trading at 1.1X P/E, which is low by any standards and is 35.7% off their median level in the past year and 62.8% off their five-year median. It appears that the difficult comps next year and a possible recession are weighing down the stock much more than they should.

Euroseas also pays a dividend that yields 9.36%.

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