Wait to buy Lululemon shares in case of likely weakness after earnings

<p>There are a few reasons why Lululemon (NASDAQ: LULU) looks like a good stock to buy for both medium and long-term investors. But I would recommend waiting until the company reports its fourth quarter results on March 26 before pulling the trigger on the LULU stock.

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I know very little about yoga, but I know that my wife sometimes does yoga at home and uses YouTube videos as her guide. And after researching a bit, I found out that there are many yoga movies on YouTube. To me, that suggests that a large number of people do yoga at home.

And I think it’s very possible that many yoga enthusiasts continue to do yoga while they are at home. With online courses, social distancing cannot stop enthusiasts.

Some of those who do yoga probably decide to order new clothes for the activity from Lululemon’s website or from Amazon (NASDAQ: AMZN). As a result, I do not expect the LULU stock to fully crater during the crisis caused by the coronavirus from China.

Lululemon’s winnings are likely to miss guidance

At the end of the third quarter, Lululemon had $ 586 million in cash and $ 695 million in debt. But over the last 12 months, its operating free cash flow was $ 521 million, and I’m sure it could borrow a lot more money from banks if necessary.

Therefore, the company, unlike many other resellers, is without risk of going bankrupt.

But, on the other hand, the company still had to close its stores in China in February, and it has closed its stores in North America and Europe until March 27. In addition, the global economic downturn will have some impact on the company’s earnings.

Despite all this, analysts’ average estimate of earnings per share for the company’s April quarter has only fallen by 4 cents over the past 90 days and dropped from 88 cents three months ago to 84 cents now.

Given all the negative catalysts that Lululemon faces, I expect its EPS guidance to fall well below 84 cents.

New initiatives will succeed in the long run

Lululemon is making efforts to improve its digital operations. One thing it focuses on is growing abroad and menswear.

Before the corona outbreak, its digital sales jumped 30% compared to the same period in Q3 and its e-commerce sales in China rose 60% on an annual basis, while its total foreign sales increased 35%. Revenues from men increased by 38%.

These growth figures are likely to decline even after the end of the coronavirus crisis due to the economic downturn. But as yoga becomes popular all over the world, I think Lululemon will see growth.

The conclusion of the LULU share

Lululemon will be able to resist coronavirus better than most retailers. And fortunately for shareholders, it will continue to have strong, positive catalysts, despite the economic downturn.

However, investors should expect the LULU share to fall after its Q4 report. Why? Lululemon’s EPS guidance is likely to fall short of expectations.

But what does this mean? Investors who plan to hold the stock in the medium or long term should buy stocks on weakness.

Larry Ramer has been researching and writing articles about US stocks for 13 years. He has been employed by The Fly and Israel’s largest business magazine, Globes. Larry started writing columns for InvestorPlace 2015. Among his very successful, conflicting choices have been GE, Sun Warehouse and Snap. You can reach him on StockTwits at @larryramer. At the time of writing, Larry Ramer did not own any of the above securities.