Lululemon's Q1 results beat expectations, but the stock stayed flat

Lululemon's Q1 results beat expectations, but the stock stayed flat

With value in vogue, the activewear stock is finding it harder to get ahead

The stock: Like most retail stocks, Lululemon Athletica (NASDAQ:LULU) did the downward dog with the onset of COVID-19 last year. But not for long: thanks to surging online sales, the Vancouver-based activewear company quickly made up the slack and capitalized on pandemic demand for informal apparel and DIY sports. Now as the viral threat recedes, thanks to mass vaccination, LULU seems to be having it both ways—operationally at least—with rebounding in-store sales contributing to Q1 revenues that were 88-percent better than last year (and, for that matter, topped sales in COVID-free 2019 by 53 percent). Curiously, this year the markets seem unimpressed.

The drivers: Its not for lack of growth opportunities. The brand may be ubiquitous in North America and a few other countries, but it has a lot of the world yet to conquer. And the rising sales of its 2020 acquisition Mirror (an enabling technology for remotely delivered fitness classes) shows it has other money-spinning ideas up its sleeve.

For all that, the stock is down year-to-date, at around US$330. Many market watchers believe the recent rotation away from growth stocks like LULU into value stocks with more reasonable valuation multiples will be in effect for a few years at least—historically, value has the edge on growth, though you wouldn’t know it from the past 10 years. If you concur, this is a stock you can leave out of your portfolio. If you’re of a more contrarian bent, though, now might be a good moment to pick up a proven performer that still has a lot of upside.

Word on the street: RBC Capital Markets analyst Beth Reed, who has an Outperform rating and a US$380 target on the stock, sums up the growth argument: “Attractive risk/reward at current levels.” The value case comes from David Swartz of Morningstar, which still regards LULU as “very overvalued.” As the company grows, its multiples will be compared with those of rivals like The Gap (NYSE:GPS), which owns the competing Athleta brand, and “comparisons will get much tougher, even for an overachiever like Lululemon,” Swartz warns.

Coming and going: CanWel Building Material Group, which we profiled in this space a month ago, has rebranded as Doman Building Materials (TSX:DBM), presumably after CEO and major shareholder Amar Doman, scion of a storied dynasty in B.C.’s forest industry. The change coincides with the acquisition of Hixson Lumber Sales of Dallas for US$375 million, a transaction that RBC analyst Paul Quinn calls “transformational” for the company, more than tripling its U.S. revenue.