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Lululemon Athletica Inc. Delivers Black Friday Feast

Lululemon Athletica Inc. (NASDAQ:LULU) came through Black Friday with a winning score. As we head into the holiday shopping season, you’ve got to have LULU stock in your portfolio.

In September, I’d called Lululemon the best Canadian retail stock to own for the next 10 years. Why? It’s faced some serious competition and lived to tell the tale. In fact, it’s thriving, as its most recent Black Friday numbers would suggest.

Don’t believe the cynics who say Lululemon’s best days are behind it. I see the party just getting started. Here’s why.

Store visits reveal several key findings

The Fung Global Retail & Technology Group, a New York-based retail advisory with offices in Hong Kong and London visited 33 stores in six U.S. markets between Thanksgiving evening and through Black Friday. Among those 33 stores was Lululemon.

One of Fung’s key findings: Lululemon had strong traffic, even though it offered shoppers few discounts. That’s what you call pricing power, and it’s a big reason why the specialty retailer will continue to win market share from some of its weaker competitors, including Under Armour Inc. (NYSE:UAA) and VF Corp. (NYSE:VFC).

“The Lululemon Athletica store we visited in Manhattan attracted very heavy traffic with live hip-hop music,” stated the Fung report. “Our Black Friday store visits indicated that the athleisure category is still going strong.”

I chastized Canaccord Genuity Group Inc. analyst Camilo Lyon recently for suggesting denim was making a comeback and that Gap Inc.’s (NYSE:GPS) Athleta athleisure brand was taking market share from Lululemon.

Consumers might be buying denim, but it’s not to replace comfortable yoga pants; rather, it’s to provide an additional piece of clothing to wear when out and about town. Just as denim 24/7 got a bit much, the same attitude applies to athleisure wear.

More importantly, Athleta is not taking market share from Lululemon. It could be taking market share from other retailers, but LULU’s recent earnings reports, along with observations from Black Friday, suggest they’re not suffering.

On the contrary

Bank of America analyst Rafe Jadrosich just raised the 12-month target price on LULU by five dollars from $70 to $75 due to store checks that found its stores were busy throughout the New York City-area as well as in Florida, two places that are hotbeds for its demographic.

Jadrosich has a buy rating on LULU, one of 18 analysts that has either a buy or overweight rating on its stock. Just two analysts have a sell or underweight rating, with Lyon one of them.

Regarding earnings, analysts expect 2017 EPS of US$2.40, US$2.71 in 2018, and US$3.11 in 2019. That’s a forward 2018 price-to-earnings ratio of 25, lower than it’s been at any time over the past five years. By every metric, it’s cheaper today than in the past, despite a growing men’s business, stronger e-commerce, and international expansion.

Bottom line on LULU stock

Free cash flow (FCF) to me is one of the actual signs of a healthy business. In the trailing 12 months ended Q2 2017, Lululemon’s FCF is higher than it’s been in the last decade and not too far off the heady days in 2010-2011 when it was higher than net income.

I see the rest of the year delivering strong results and into 2018. At almost $67, it’s not overpriced, in my opinion.

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Fool contributor Will Ashworth has no position in any stocks mentioned. David Gardner owns shares of Under Armour (C Shares). Tom Gardner owns shares of Under Armour (C Shares). The Motley Fool owns shares of Under Armour (C Shares). Under Armour is a recommendation of Stock Advisor Canada.

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