Lululemon Athletica (LULU) Sells Off Despite Strong Quarter

Lululemon Athletica Inc. (LULU) is trading sharply lower ahead of Wednesday's opening bell despite beating top- and bottom-line second quarter 2020 estimates. The athletic apparel designer and retailer posted a profit of $0.74 per share, $0.18 better than expectations, while a 2.25% revenue increase to $902.9 million beat $847.4 million estimates. The company chose not to provide fiscal year guidance due to ongoing uncertainty as a result of the COVID-19 pandemic.

Key Takeaways

  • Lululemon Athletica beat second quarter profit and revenue estimates.
  • The sell-the-news reaction follows similar action in other hot 2020 stocks.
  • Solid accumulation readings should limit downside in coming sessions.
  • The 50-day exponential moving average (EMA) at $341 marks the first upside barrier for a recovery rally.

The bearish reaction follows recent reversals in 2020's big gainers, highlighting broad-based overbought technical conditions following numerous breakouts to all-time highs. The market is now reconsidering those uptrends, wondering if many stocks have overshot logical targets and/or reasonable valuations. The selloff may catch the specific attention of Peloton Interactive, Inc. (PTON) shareholders because that company will report earnings after Thursday's closing bell.

Wall Street consensus on Lululemon was mixed ahead of the release, with a "Moderate Buy" rating based upon 17 "Buy" and 10 "Hold" recommendations. No analysts are recommending that shareholders sell positions at this time. Price targets currently range from a low of $228 to a Street-high $449, while the stock is set to open Wednesday's session about $40 below the median $371 target. Analysts have yet to post commentary about the stronger-than-expected second quarter metrics.

Valuation is the analytical process of determining the current (or projected) worth of an asset or a company. There are many techniques used for doing a valuation. An analyst placing a value on a company looks at the business's management, the composition of its capital structure, the prospect of future earnings, and the market value of its assets, among other metrics.

Lululemon Athletica Long-Term Chart (2010 – 2020)

Long-term chart showing the share price performance of Lululemon Athletica Inc. (LULU)

The stock broke out above the 2007 high at $30.35 in 2010 and took off in a strong advance that topped out above $81 in the second quarter of 2012. A 2013 breakout attempt failed, yielding a steady decline that posted a three-year low in the mid-$30s in 2014. It took nearly four more years for the subsequent uptick to reach the prior high, ahead of an April 2018 breakout that presaged the most prolific returns in more than a decade.

The rally topped out at $266 in February 2020, giving way to a 137-point vertical slide into a 14-month low. The subsequent recovery wave unfolded at the same trajectory, returning the stock to the first quarter high in May. An immediate breakout carved two rally waves that added more than 100 points into early September's all-time high at $399.90, while the subsequent turnaround has now relinquished 65 points and broken support at the 50-day EMA.

Lululemon Athletica Short-Term Chart (2018 – 2020)

Short-term chart showing the share price performance of Lululemon Athletica Inc. (LULU)

The on-balance volume (OBV) accumulation-distribution indicator has matched price action every step of the way, posting a string of new highs in 2019 and 2020. However, the minor distribution wave that started last week will now expand due to an overnight decline that is likely to generate aggressive selling volume. A break of the top and bottom blue lines would set off short-term sell signals in this set-up, but it would take many down days to yield a larger-scale breakdown.

The rally ended just below the 2.000 Fibonacci extension of the pandemic decline, a harmonic level that has acted as an impenetrable barrier on other 2020 momentum plays in recent weeks. The stock is trading around $334 at the time of publication, marking the first trip below the 50-day EMA since March. It is also situated about nine points above the July breakout at $325, marking a support level that could generate a strong bounce in coming sessions.

Momentum is the rate of acceleration of a security's price or volume – that is, the speed at which the price is changing. Simply put, it refers to the rate of change on price movements for a particular asset and is usually defined as a rate. In technical analysis, momentum is considered an oscillator and is used to help identify trends.

The Bottom Line

Lululemon Atheletica is selling off in the pre-market, despite reporting strong second quarter results that beat expectations.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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