If You’re Looking for Quality, Piper Sandler Likes This Leisure Stock

Lululemon (LULU) got an upgrade from Piper Sandler analyst Abbie Zvejnieks on Oct. 11. Zvejnieks raised it from Neutral to Overweight, suggesting that when it comes to retail stocks, the apparel brand is the best of the bunch. 

“In what we view as a tougher and more uncertain consumer environment, we want to point investors to quality,” The Globe and Mail reported the analyst said. “We continue to believe LULU has best-in-class product innovation, which should drive demand, and we do not believe LULU will have to react as much as peers to the more intense promotional environment.”

Translation: LULU’s margins will be higher heading into the holiday shopping season. 

In addition to upgrading LULU stock, the analyst raised her price target by $30 to $350, 19% higher than where it currently trades.

If you’re looking for quality retail stocks, Zvejnieks believes Lululemon should be at the top of your list. I do too. Here’s why.

Lululemon’s Stock’s Down 24% 

Lululemon’s shares are down more than 24% year-to-date. It's not hard to find stocks down that much. According to Barchart.com’s stock screener, 1,132 stocks with market caps greater than $1 billion on the New York and Nasdaq stock exchanges are down 24% or more in 2022.

It’s a sea of red ink out there and could get a lot worse. JPMorgan Chase & Co. (JPM) CEO Jamie Dimon said it will get much worse in 2023. He believes there will be a U.S. recession in 6-9 months. 

The S&P 500 could easily fall another 20% by this time next year. Now is not the time to be overly aggressive in stock buying. However, if you have some funds sitting around idle, a quality stock such as LULU makes sense over the long haul. 

If you bought LULU stock in the March 2020 correction today, despite the 40% decline from its all-time high of $485.83 in November 2021, you’d still be sitting on a 76% gain in the 30 months since. The index is up 55% over the same period. 

This might not seem like a big difference. However, extend the gains over 10-20 years, and it’s significant outperformance.

The one-year anniversary of Lululemon’s downturn from its 52-week and all-high arrives next month. The 2020 correction lasted barely a month. At some point, investors will start buying its stock. 

In the meantime, it will continue to generate healthy growth on the top and bottom lines. 

Nike Drags Down Lululemon

At the end of September, Nike (NKE) lost more market cap in a single day than it had in the previous two decades. The cause was a 65% increase in its Q1 2023 inventory, which led to lower gross margins in the quarter. As a result, it lowered its outlook for the year.

I’ve found over the years that Nike tends to be very conservative in its guidance. There's a good possibility that it will exceed its guidance in the coming quarters, and the stock will rebound from its 47% hole YTD.

In the meantime, however, Lululemon’s gotten caught in Nike’s wake and has lost 18% in the past month alone, some of it due to Nike’s woes. 

Lululemon reported Q2 2022 results in early September. They were much healthier. 

On the top line, revenues increased 29% to $1.9 billion, with a 25% increase in same-store sales excluding currency. On the bottom line, its adjusted earnings per share were $2.20, 35% higher than a year earlier. Its gross margin declined by 160 basis points to 56.5%. However, its operating margin increased by 30 basis points to 21.5%. 

Business is still solid. We’ll know more when it reports its third-quarter results in early December. 

CEO Calvin McDonald was pleased with its performance.

“The momentum in our business continued in the second quarter, fueled by strong guest response to our product innovations, community activations, and omni experience,” McDonald stated in its Q2 2022 press release.

The company continues to drive growth through its Power of Three x2 strategic plan, which includes doubling its revenue from $6.25 billion in 2021 to $12.5 billion in 2026. 

I discussed some of its growth plans in April. In particular, I noted that LULU stock had delivered almost 4x the appreciation of the S&P 500 in the four years since McDonald was hired as CEO to change the company’s culture. 

Lululemon continues to deliver strong growth despite global headwinds, such as inflation and higher interest rates. The Piper Sandler analyst’s upgrade acknowledges that it’s delivering the goods in challenging conditions.

Of the 20 analysts covering LULU stock, 12 rates it a Strong Buy, with an average Moderate Buy rating and a mean target price of $389.18, higher than the Piper Sandler analyst’s target. 

I continue to view Lululemon as the top name in apparel retail. 

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