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Stocks  | June 18, 2020

Lululemon (NASDAQ:LULU) has been one of my go-to stocks for a while now. You might remember that good old Lululemon stock was my pick in InvestorPlace’s “Best Stocks for 2019” contest.

I won that contest, thanks to the 91% return that Lululemon gave us last year.

Of course, it’s foolhardy to keep with a stock just because it has been successful in the past. Smart investing in growth stocks means you need to look for equities that have a strong growth story moving forward.

Thankfully, Lululemon still fits the bill — despite what many are calling a disappointing earnings report last week.

I’m still a Lululemon stock bull. In fact, the biggest takeaway for me from last week’s earnings report is that the stock can be had right now at a sweet little discount.

Lululemon Earnings at a Glance

Lululemon stock fell 8% last week after the company reported its earnings for the fiscal first quarter of 2020. Revenue of $652 million and earnings per share of 22 cents were both below Wall Street’s estimates of $688.48 million and 23 cents EPS.

The revenue numbers were 17% lower than a year ago, while diluted EPS was down a whopping 70.3%. Operating income also fell big, down 75% on a year-over-year basis to $32.75 million.

Anyone who follows retail should have been expecting those kinds of numbers. The novel coronavirus wreaked havoc on retailers and the U.S. economy since March, and it’s going to take some time for those numbers to recover.

Lululemon has online sales, but gets a big chunk of its business from its nearly 500 stores. More than half of those are in the U.S., and I expect better numbers now that the country is opening back up.

The Story Behind Lululemon Stock

Dig a little deeper behind those numbers, however, and you’ll start seeing why I’m bullish on Lululemon now.

For one thing, it’s important to note that Lululemon still managed to turn a profit in the first quarter, despite being wrecked by the Covid-19 pandemic.

Revenue from its digital sales and direct-to-consumer business increased by 70% on a year-over-year basis, making up 54% of the company’s revenue for the quarter.

That shows how powerful the Lululemon brand is. As I’ve pointed out before, Lululemon has a powerful base of loyal customers, in part because its brand promotes exclusivity. It doesn’t flood the market with merchandise like Nike (NYSE:NKE) does. And it can charge a premium for trendy clothes that are in demand.

In short, people are willing to spend a little more and do their shopping online, even during the pandemic, because they value Lululemon’s yoga pants, leggings and other “athleisure” wear more than the competitions. That’s a powerful reason to hold Lululemon’s stock.

And remember, research from Piper Sandler shows that the company is among the top 10 preferred apparel brands. The company moved up two spots, from No. 8 to No. 6, compared to the previous survey.

Oppenheimer analyst Brian Nagel is one analyst who, like me, is a believer in Lululemon right now. Although he lowered fiscal year 2020 EPS estimates from $4.74 to $4.06, he says the long-term growth story for the company is a compelling one.

He gives Lululemon an outperform rating with a $370 price target, according to Nagel:

“We have studied closely the latest trends at LULU and come away from our work incrementally convicted in our positive intermediate- to longer-term call on the company and its shares. In the nearer term, COVID-19 challenges are apt to persist. That said, as crisis-related headwinds gradually abate, we are hard-pressed to envision another consumer enterprise as well-positioned as LULU to capitalize upon ongoing shifts in spending and potentially easing competitive pressures.”

The Bottom Line on Lululemon

While Lululemon fell 8% after last week’s earnings report, the stock is already starting to rebound and it won’t be long before it’s challenging all-time highs again.

Nagel’s price target of $370 represents 18% growth in LULU stock — something that I think is certainly achievable. Lululemon has a ‘B’ rating in my Portfolio Grader, where it carries a buy recommendation right now.

A revolutionary initiative is helping average Americans find quick and lasting stock market success.

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