What happened
Lululemon Athletica (LULU -0.03%) shareholders trounced a rising market on Thursday as shares jumped 10% by 12:30 p.m. ET compared to a 1.9% boost in the S&P 500. The rally wasn't enough to put the apparel retailer's stock back in positive territory for the year, but shares are above the lows they set earlier in the week.
The rally was sparked by a stock upgrade that called Lululemon's recent sell-off overblown.
Image source: Getty Images.
So what
An analyst at Morgan Stanley's investment arm upgraded Lululemon's stock to the equivalent of a buy rating while assigning a short-term price target of $303 per share. That valuation is lower than the firm's previous $339 target, but still represents a significant increase from Lululemon's current trading level.
The analyst said the stock's sell-off in recent days has created a more compelling buying opportunity, even after factoring in the likelihood of slower growth ahead and potentially weakening earnings results.
Now what
Investors won't have to wait long to find out if Lululemon is still outperforming peer apparel retailers.
The company will announce its first-quarter earnings results on June 2, and expectations are running high heading into that announcement. Lululemon entered the period with strong momentum, but the fear is that selling conditions worsened over the last few weeks.
Slower growth might convince management to reduce its sales and earnings outlook in a few days. But Lululemon's longer-term outlook is bright. Profitability has been steadily rising since before the pandemic, and the chain's sales consistently outpace the wider apparel market.
While it's likely that the business will take a step backward if economic conditions worsen, Lululemon's operating strength should allow it to generate solid returns for investors who hold the stock over the long term.
