Remember the sharp selloff in Lululemon Athletica Inc. shares on Thursday, after the company released its quarterly earnings? Well, it’s gone: The shares, which had been down as much as 16 per cent, have since fully recovered. In Friday’s midday trading, they were up 5.8 per cent – making Thursday’s dip look like a gimme for nimble investors.
To their credit, analysts turned slightly more bullish on the stock, with KeyBanc Capital upgrading its recommendation to “buy” from “underweight” and boosting its price target by $20, to $58 (U.S.). Barclays Capital raised its recommendation on the stock to “overweight/neutral” from “equal weight/neutral.”
So you have to wonder what drove the selloff in the first place. There was a warning in the company’s quarterly report – that margins could get squeezed after the holidays, due to markdowns. As well, sales failed to meet expectations, even though they surged 31 per cent, to $230.2-million. This is not a cheap stock, given that it trades at 49-times trailing earnings and nearly 33-times estimated earnings, making setbacks lethal.
But the initial selloff was clearly overdone, given the subsequent snapback. As Josh Brown at The Reformed Broker explained on Thursday evening, after he took advantage of the Lululemon discount: “I pulled the trigger not because of any deep knowledge I have about the company or any kind of innate skill I have at swing trading (I have no such thing). I bought just because I’ve been around the block a few times and have seen this kind of stupid reaction before.”
“Only an imbecile looks at +30 per cent revenue growth as a ‘disappointment’ – especially amidst a market full of other stocks that couldn’t grow their top line revenues if their lives depended on it. And the fact that LULU may not have met sell-side analyst expectations means absolutely nothing to me.”