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Why Lululemon Stock Was Up 15% in August

By Jon Quast - Updated Sep 4, 2020 at 11:35AM

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The company reports highly anticipated second-quarter results next week, but analysts are divided on where the stock is headed next.

What happened

Shares of athletic-apparel company lululemon athletica (LULU -0.71%) went up 15.4% in August, according to data provided by S&P Global Market Intelligence. The company didn't have any news to report during the month, but a couple of analysts raised their price targets on the stock, anticipating solid upcoming results for the fiscal second quarter of 2020.

However, in the last week or so, some analysts have started ringing the alarm on Lululemon stock, warning it may be overvalued. Shares are up over 50% year to date.

LULU Chart

LULU data by YCharts

So what

The coronavirus has changed consumer habits, at least temporarily. People are buying more leisure clothes since they don't have to go into the office, and they're also exercising at home more. Given Lululemon's core athleisure products and recent Mirror acquisition, it's right at the center of these two trends.

Analysts have taken note. According to The Fly, a B. Riley FBR analyst raised their target price on Lululemon stock by 21% on Aug. 18. The buy rating now has a target of $385 per share. Not to be outdone, a Susquehanna analyst then raised their target price from $360 per share to $426 per share. As target prices were raised, the stock climbed.

More recently, however, a couple of analysts (not all) have downgraded Lululemon stock. The common thread is a belief the stock is overvalued. To be fair to these analysts, the stock does currently trade at a price-to-earnings ratio and a price-to-sales ratio above their five-year averages. The stock has pulled back a little because of these fears.

A row of sequentially taller, wooden blocks are each topped with an upward pointing arrow.

Image source: Getty Images.

Now what

Trading at a historically high valuation doesn't necessarily mean Lululemon stock is overvalued. It merely means investors have outsized expectations for the company's second-quarter results on Sept. 9. To be sure, there's a lot to be excited about since the company's acquisition of Mirror. The company can hopefully take Mirror's high-growing customer base and bring them into the Lululemon brand, and vice versa. 

However, in the end, looking to the next quarter or even setting a price target for the next year is shortsighted. The shorter a time frame, the harder it is to predict movement in a stock's price. Investors should try to measure Lululemon's progress against its five-year plan. As long as it's executing it can reward shareholders over the long term, even if there are ups and downs along the way.

Jon Quast has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Lululemon Athletica. The Motley Fool has a disclosure policy.

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