Lululemon (NASDAQ:LULU) has been lagging since the company reported earnings in early June. However, LULU stock caught a bid on June 30, on news that it will acquire Mirror for $500 million.
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Shares closed off the highs, but still climbed 6% on the day. Why the enthusiasm? Because Lululemon bought into a growing secular theme that plays nicely with its current business model.
Breaking Down the Deal
Mirror is an at-home workout startup. Like its name implies, the company’s lead product is literally a giant mirror that also plays video. That video allows instructors to lead live classes, giving a gym-like experience to users who are at home.
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It’s sort of like Peloton (NASDAQ:PTON), shares of which have exploded higher in 2020 as the stay-at-home theme continues to thrive.
Hopefully the novel coronavirus won’t continue its rapid spread and domination for years to come. Whether it does or not though, may not matter. The stay-at-home theme seems to have staying power, which is why investors were so enthusiastic by Lululemon’s purchase, even if it takes a while to contribute to the top and bottom line.
At the end of the day, the at-home workout business has momentum and ties in with Luluelemon’s workout apparel lineup, giving the deal potential to be could be a great fit. Mirror customers now have a tie to Lululemon apparel, and Lululemon customers now have a convenient although pricey at-home workout solution in front of them.
A Look at LULU Stock
I continue to like Lululemon — and not just because of the acquisition. Like Nike (NYSE:NKE), Lululemon has a powerful brand and loyal customers. As a result, it’s a name that we want to own for the long term.
Admittedly, there will be ups and downs. But the rallies in LULU stock will outweigh the declines, something we have seen play out quite well in 2020.
When Lululemon Athletica last reported earnings, we got a mixed result. Revenue slumped more than 16% year-over-year to approximately $652 million, missing analysts’ estimates by almost $50 million.
As strange as it feels to say, the company’s revenue decline was “only” 16%, though. Far more companies saw an even worse drawdown in the quarter, as Covid-19 put a serious dent in sales. In that light — with so many store closures — I view that sales number as pretty good.
More encouraging were Lululemon’s online sales. E-commerce sales boomed in the quarter, rising to $352 million, up almost 70% vs. the same period a year ago. Those looking at the numbers might quickly deduce that $352 million in online sales is rather significant against $652 million in overall sales.
In fact, it’s just over half at 52%. While that figure may not have staying power once stores begin to reopen, it’s an encouraging sign given the future of retail.
As the world returns to a state of normalcy, so too should Lululemon. If that’s the case, it means a return to growth. Consensus expectations call for roughly flat revenue growth in 2020. However, next year expectations are looking for 24% revenue growth.
That’s what we expect with a brand like Lululemon, although investors are cognizant enough to recognize the (hopefully short-term) impact of Covid-19.
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Source: Chart courtesy of StockCharts.com
From peak to trough, LULU stock fell more than 50%. However, the stock then rallied more than 150% from the lows into earnings in early June.
With the mixed results, shares gently pulled back, before gapping higher on the Mirror news. So now what?
To see more upside, investors need Lululemon’s stock to push through the 138.2% extension at $318.67, putting the all-time highs and current resistance in play near $325. Above that and, technically speaking, the 161.8% extension could be in play near $350.
On the downside, a break of Tuesday’s low puts a gap-fill in play back toward $293. Below that could put the 50-day moving average in play.
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