Lululemon stock drop ‘has made investors more interested,’ UBS says

Lululemon Athletica (LULU) is slated to report its fourth-quarter results later this month.

Since the beginning of the year, Lululemon’s stock price has dropped 19% compared to the S&P 500’s decline of about 6%. But according to a new note to investors from UBS, investors continue to view the retailer as a long-term market share gainer.

“Our conversations with investors suggest the stock price change has made investors more interested in buying the stock,” the analysts wrote. “Investors continue to view LULU as a long-term market share gainer capable of delivering better growth than almost all other softline companies can. Our sense is investors are looking for signs in the 4Q report LULU’s fundamental narrative is intact.”

HONG KONG, CHINA - 2022/03/16: A couple wearing surgical masks walk by a Lululemon store in the Central Business District of Hong Kong. According to the Hong Kong Government's economic analysis, the retail sector is facing immense pressure in the near-term, with the pandemic and associated social distancing measures creating challenges for a revival. (Photo by Ben Marans/SOPA Images/LightRocket via Getty Images)

A couple wearing surgical masks walk by a Lululemon store in the Central Business District of Hong Kong on March 16, 2022. (Photo by Ben Marans/SOPA Images/LightRocket via Getty Images)

In January, the company said in a press release it expects fourth-quarter revenue to be at the low end of its range of $2.125 billion to $2.165 billion. It also expects adjusted earnings to be diluted to the lower end of $3.25-$3.32 per share.

CEO Calvin McDonald attributed the change in outlook to the effects of the highly contagious Omicron variant that became dominant this winter and left many retailers to face labor problems as staff became sick or exposed to the coronavirus.

“We started the holiday season in a strong position but have since experienced several consequences of the Omicron variant, including increased capacity constraints, more limited staff availability, and reduced operating hours in certain locations,” McDonald said in a statement, adding: “I am proud of how our teams continue to deliver for our guests, and we are excited about what the future holds for Lululemon.”

‘The bar’ for Lululemon earnings

Last quarter, Lululemon’s top-line sales grew 30% year-over-year to $1.5 billion, which was ahead of expectations. Even with global supply chain disruptions severely hurting the apparel business, Lululemon seemed to weather the disruptions better than its competitors.

Lululemon’s revenue growth was driven by a 28% increase in North America. At the same time, the athletic brand also found strong demand in categories like outerwear and menswear. Since then, the company also announced its official entrance into the footwear world with the debut of its shoe brand, Blissful, which offers running shoes for women.

A Lululemon store in Beijing, China, on July 4, 202

A Lululemon store in Beijing, China, on July 4, 2021. (Costfoto/Barcroft Media via Getty Images)

Despite major headwinds in the fourth quarter, the UBS analysts are optimistic about the company’s guidance and set a price target of $430 for the stock while maintaining a Neutral rating ahead of the fourth-quarter results.

“We think ‘the bar’ for the event is LULU’s FY22 guidance brackets the current $9.08 consensus,” the analysts noted. “However, even if FY22 or 1Q22 guidance is moderately below consensus solely due to macro, we don’t think it will have an outsized negative impact on the stock price. The reason is we wouldn’t expect this type of guide to materially change investors’ long-term views.”

UBS also forecasted that Lululemon will deliver high single-digit annual growth on average over the next four years after the pandemic based on two points: the athletic wear category likely continues to take share and Lululemon’s strong brand loyalty and product execution capabilities.

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter: @daniromerotv

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