Thursday's Market Minute: Lulu's Snap Back?

The market darling, Lululemon Athletica Inc LULU, took a hit in its share price after reporting earnings last night, but the downward move didn’t last long. Shares have already made back $10 in premarket trading from their initial $20 drop, and continue to tick higher as different analysts raise their price targets on the high-end athleisure retailer.

A Piper Jaffray analyst raised her estimates for LULU to $245 from $244 based on last night’s “strong” and “clean” earnings beat, reflected in growing menswear and outerwear divisions and improving gross margin. At Wells Fargo & Co WFC, Lulu’s price target was lifted to $260 from $230 on an “as usual” and “exemplary” quarter. As of Wednesday night’s close, shares of LULU are trading at $233.19. In its third quarter, Lululemon reported Y/Y revenue growth of 23 percent as well as a 16 percent increase in comparable sales, compared to the same quarter last year. Menswear alone climbed 38 percent.

Why did shares turn to the downside at all then? What traders may not have liked to see out of the report was LULU’s softer guidance for next quarter, which came in just shy of analyst estimates for both EPS and revenue. For what should be the retailer’s best quarter of the year, Lululemon sees net revenue in the range of $1.32 to $1.33 billion, and diluted EPS between $2.10 to $2.13.

For the full year, however, the updated guidance topped estimates. CEO Calvin McDonald blamed next quarter’s weakness on the six fewer shopping days in the holiday season. Maybe the downturn was just a matter of time. Lulu’s stock has been on a run. Shares are up more than 90 percent year-to-date as the company implements new measures like megastores in Chicago, complete with yoga studios and cafes. The question going forward, though, is how much can the stock continue to stretch higher without snapping back?

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