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Lululemon earnings may defy economic woes

Sportswear retailer, Lululemon, is set to report the financial results from its fiscal Q2 (ending July 31st) after the US market close on Thursday, September 1st.

Here are some top-line figures to look out for:

  • Earnings per share (EPS) forecast: US$1.86
  • Revenue forecast: US$1.77 billion (+22% year-on-year)

Notably for investors, Lululemon had surpassed consensus estimates for the past eight consecutive quarters; and that record is expected to officially become 9-in-a-row later today.

 

Economic woes fuelled double-digit stock declines so far in 2022

This is despite the fact that sports stocks have remained under pressure so far this year as headwinds intensify for the global economy due to scorching inflation, which has major central banks scrambling to raise their respective benchmark interest rates, all in the name of destroying some demand to ease inflationary pressures. Such policy tightening also risks triggering a recession.

With such woes in mind, no surprise then when looking at the double-digit year-to-date declines in the share prices of these major sportswear companies:

  • Lululemon: -23.37%
  • Nike: -36.13%
  • Adidas: -41.53%
  • Puma: -43.53%
  • Under Armour: -60.26%

However, Lululemon’s relatively better performance compared to its industry peers are noteworthy despite its relatively expensive price tag from a valuations perspective.

Its PE ratio is at nearly 37, which is much higher from the sub-30 PE ratios for the likes of Nike, Adidas, and Puma.

 

But all that’s in the past. And markets are generally forward-looking in nature.

Hence, forward guidance out of Lululemon’s C-suite later today should also harbour great potential to move this stock.

 

Lululemon’s 2026 goal faces China risks

Back in April, CEO Calvin McDonald shared a new 5-year growth strategy, with the aim of doubling its 2021 sales levels to reach US$ 12.5 billion in revenue by 2026.

How does Lululemon plan to reach such a target?
By expanding its products for men, leaning harder into digital expansion and innovation, as well as quadrupling its international sales.

And on that last point about international sales, therein lies a major problem for this Canadian athleisure retailer.

Tensions between the US and China are once again resurfacing, and this could hurt Lululemon’s financial performance in the coming years.

Note that:

  1. Taiwan accounts for almost half (48%) of the fabrics that Lululemon uses for its products. Hence, any supply disruptions out of that island that’s at the centre of the latest bout of US-China tensions, would have a disastrous impact on earnings.
     
  2. China is also a crucial market for Lululemon’s sustained growth:
    • 7% of Lululemon’s products are made in China
    • 19% of fabrics are sourced from China
    • 7% of Lululemon’s overall sales are from China
    • China is Lululemon’s second-largest market in terms of physical stores. Lululemon aims to triple the number of its stores in China, taking advantage of that low base effect.

However, all that could come undone if tensions between the US and China escalate further, making it harder for foreign companies to do business, much less expand, in the world’s second largest economy.

With all that in mind, Lululemon’s commentary surrounding the company’s outlook, not just in weathering the present macroeconomic headwinds but also risks surrounding its ambitious 5-year plan, will be closely scrutinised by both existing and potential shareholders.

 

Lululemon testing 50-day SMA support

From a technical perspective, the price chart shows Lululemon shares testing its 50-day simple moving average (SMA) for immediate support.

The stock is also trading around a key Fibonacci retracement level (23.6%) from its November record high down to its May low.

To be fair, the stock has also been forming a short-term uptrend (higher highs and higher lows) since dipping below $252 back in May.

A break below the key 50-day SMA and into sub-$290 domain could invite bears to test several support levels around $280, a region where price action got muddied in the one-month period between mid-June and mid-July.

To the upside, resistance may arrive around $324-$325, which marks the previous cycle high and the downward upper trendline that has been in place since that November record high.

Lululemon earnings may defy economic woes

As things stand, the options market is pricing in a 6.5% move either way (up or down) as an immediate reaction to Lululemon’s announcement.

Overall, it remains to be seen whether the expected positive surprises in Lululemon’s earnings would be able to offset the general risk-off mood across global markets of late.

 

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