Thursday, March 26, 2020

Investors Are Ready, Set, Bullish About Lululemon

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What’s happening: Lululemon Athletica is scheduled to report its fourth-quarter results after the closing bell on Thursday, March 26.

What happened: Shares of Lululemon have been under pressure in the lead up to the fourth-quarter earnings call. The athletics apparel giant closed all its stores in North America and Europe starting mid-March. Although management said they’d be looking to reopen the stores by the end of the month, this doesn’t seem possible considering the current coronavirus scenario.

Yet, as the company prepares to present its quarterly results, investor sentiment is turning positive for a number of reasons.

Details: Lululemon has topped estimates for both earnings and revenue every quarter for the past two years. Despite the coronavirus, the company’s quarterly estimates have seen upward revisions over the past three months. This is because Lululemon’s presence in Asia is limited and its fourth-quarter sales will not include the COVID-19 impact in North America and Europe.

  • The consensus revenue estimate for the fourth quarter is $1.38 billion, representing a healthy 17.9% year-over-year growth.
  • The estimate for earnings is $2.25 per share, with 21.6% growth from the same quarter in the previous year.

Why it matters: Lululemon has been a trendsetter in athleisure, forcing major sporting brands to include this category of apparel.

Archrival Nike saw its shares surge almost 10% after reporting strong results earlier this week. Shares of Lululemon could take the same trajectory in case the results are solid.

The athleisure giant had taken several initiatives to continue growing. It introduced outwear and was planning to double its menswear business by 2023. Moreover, the company had plans to expand in Asia, expecting a fourfold rise in its international sales. In the current situation, this will give Lululemon a path to grow while its operations in North America and Europe are impacted by the coronavirus.

The company’s digital business has performed well so far and could provide another avenue for growth, as people attend online yoga and other workout classes amid the current social distancing trend.

While the coronavirus-led economic slowdown will dampen Lululemon’s sales going ahead, the company had operating free cash flows of $521 million in the past twelve months.

How the shares have performed so far: Shares of Lululemon have lost around 19% in the past month amid the larger market sell off. In the last five trading sessions, however, the stock has gained 38%. Despite this surge, Lululemon’s shares closed at $192.74 yesterday, which is significantly lower than the record high of $266.20 achieved in February.

What to watch: Lululemon’s current share price is considered an attractive entry point. Any weakness from here could trigger buying, as will strong fourth-quarter results from the company. Investors will also be keeping a close eye on the company’s outlook. It remains to be seen whether the company issues any guidance for the upcoming quarter or decides to wait for the current situation to settle.

The Markets Today

     

Investors will be watching UK indices today, ahead of the Bank of England’s March meeting scheduled for later in the day.

Context: UK stocks closed higher yesterday following a 9% surge on Tuesday after the US lawmakers reached a deal on the $2 trillion coronavirus stimulus package.

Details: UK stocks started the session on a positive note with the White House and Senate leaders agreeing to a package to ease the coronavirus impact on the economy. Although stocks pared most of the gains by midday, they delivered a strong recovery in the afternoon. The FTSE 100 closed 4.5% higher on Wednesday.

The sterling traded mixed against its major rivals, rising 0.6% against the US dollar, but slipping 0.2% against the euro.

The Bank of England had lowered its interest rates twice this month and also expanded its bond-buying program to help support the economy. So far, coronavirus has infected over 9,600 people in the UK and claimed around 460 lives.

In economic news, UK producer prices rose 0.4% in February, versus a 1% rise in January. Consumer price inflation slipped to 1.7% in February, from 1.8% in the earlier month.

In corporate news, shares of Rentokil dropped 8% after the company withdrew its 2020 forecast and suspended its dividend. Virgin Money UK’s shares spiked 27%.

What to watch: The market will be focusing on the Bank of England’s meeting, hoping for stimulus related announcements. However, the bank is likely to hold off more initiatives for now. Investors also await the retail sales report from the country. UK retail sales are expected to rise 0.2% in February, versus a 0.8% increase in January.

Other Markets: Most US indices closed higher on Wednesday, with the Dow and S&P 500 up 2.39% and 1.15%, respectively. The Nasdaq 100 bucked the trend to close 0.45% lower.

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What else to watch today

     

Germany’s GfK consumer sentiment indicator, France’s industry climate indicator, Eurozone’s household credit growth, loans to private sector and money supply, South Africa’s producer prices, Brazil’s IBC-Br economic activity index, Mexico’s unemployment rate and overall index of economic activity as well as the US GDP growth rate, initial jobless claims, goods trade balance, wholesale inventories, natural gas stocks change and Kansas Fed manufacturing index