Trends to Watch Pre-Q3 Earnings: Buy lululemon Stock Now or Wait?

lululemon athletica inc. LULU is likely to witness top and bottom-line growth when it reports third-quarter fiscal 2024 results on Dec. 5, after market close. The Zacks Consensus Estimate for fiscal third-quarter sales is pegged at $2.4 billion, indicating a 6.8% increase from the year-ago quarter's reported figure.Stay up-to-date with all quarterly releases: See Zacks Earnings Calendar.The consensus estimate for the company's fiscal third-quarter earnings is pegged at $2.69 per share, suggesting a 6.3% rise from the year-ago quarter’s actual. Earnings estimates have moved down by a penny in the past seven days.The Vancouver-based company has been reporting steady earnings outcomes, as evident from its top and bottom-line surprise trends in the trailing four quarters. LULU has a trailing four-quarter earnings surprise of 7.9%, on average. Given its positive record, the question is, can LULU maintain the momentum? Image Source: Zacks Investment Research Earnings WhispersOur proven model conclusively predicts an earnings beat for lululemon this season. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.lululemon has an Earnings ESP of +0.45% and a Zacks Rank of 3. You can see the complete list of today's Zacks #1 Rank stocks here.Key Insights on Trends to Define LULU’s Q3 Resultslululemon is expected to have continued its business momentum in the third quarter of fiscal 2024, showcasing growth across various channels, regions and product categories. This growth is likely to have been driven by positive consumer response to its products, increased in-store traffic and a robust online performance.lululemon is also poised to benefit from the strong business momentum in its international markets, including Mainland China and the Rest of the World, as the brand connects well with customers globally. The company is optimistic about its potential in Mainland China, where it is expanding its stores and e-commerce platforms. It plans to continue its strategies to boost global brand awareness, which is likely to have contributed to the top-line performance in the fiscal third quarter.On the last reported quarter’s earnings call, management expressed confidence in the ongoing strength of its international business, particularly in Mainland China. Our model forecasts international revenues of $548.5 million for the fiscal third quarter, accounting for 23.3% of the total revenues. We expect revenues in Mainland China to be $277.8 million.lululemon athletica inc. Price and EPS Surprise  lululemon athletica inc. price-eps-surprise | lululemon athletica inc. QuoteThe company has been on a growth trajectory with its Power of Three x2 growth plan, focusing on product innovation, guest experience and market expansion. Strategic initiatives like community-based events and brand campaigns have been crucial for increasing brand awareness, attracting customers and strengthening brand loyalty. These efforts are expected to have aided the company's fiscal third-quarter performance.Additionally, lululemon's men's business has maintained strong momentum, driven by positive customer response to innovations across performance, lounge and the ABC franchise. With significant market share gains in the men's category, the company sees this as a key growth opportunity, contributing meaningfully to its top line in the upcoming quarter. Our model predicts revenues for the men’s category to increase 10.8% year over year in the fiscal third quarter, reflecting 23.7% of total revenues.On the last reported quarter’s earnings call, management anticipated net revenues of $2.34-$2.365 billion for the fiscal third quarter, indicating 6-7% year-over-year growth.Our model predicts company-operated stores and the direct-to-consumer channel to see year-over-year revenue growth of 8.1% and 5.3%, respectively, in the fiscal third quarter. Other sales are expected to rise 8.3% year over year.The company expects SG&A expenses, as a percentage of sales, to decline 40-50 basis points (bps) year over year in the fiscal third quarter, led by improved sales and ongoing expense management. Our model estimates the SG&A expense rate to decline 70 bps to 37.7% for the fiscal third quarter.However, lululemon continues to face challenges from inflation, which has reduced discretionary spending and pressured its women’s category, particularly in the Americas. Rising inflation and higher interest rates have made consumers more selective with their purchases, posing a significant hurdle for luxury brands like lululemon, especially in the United States.A slowdown in the women’s category has been attributed to a product strategy with fewer updates to core and seasonal styles, such as limited changes in color, print, patterns and silhouettes. This lack of newness, driven by earlier product decisions, has resulted in fewer fresh options for female shoppers, affecting conversion rates.While lululemon remains confident in its innovation pipeline and long-term recovery, near-term results are expected to reflect the lack of new products in the women’s category, as outlined in its fiscal third-quarter outlook.The company has also faced inventory shortages in key product lines, including popular bag designs and essential apparel sizes and colors, particularly in the United States. Efforts are underway to address these gaps, with stock replenishment anticipated in the second half of fiscal 2024. These inventory issues have likely impacted margins in the fiscal third quarter.On the last reported quarter’s earnings call, management projected a gross margin contraction of 50-60 basis points (bps) year over year, driven by fixed cost deleverage and ongoing investment in its multi-year distribution center project. While product margins are expected to remain flat year over year, higher freight costs are anticipated to contribute a 60-bps increase, with markdowns remaining stable.We estimate a 50-bps year-over-year decline in the adjusted gross margin, bringing it to 57.6% for the fiscal third quarter.LULU’s Price Performance & Valuationlululemon’s shares have exhibited an uptrend in the past three months, rising 23.1% compared with the industry’s growth of 14.8%. Additionally, the company has outperformed the Zacks Consumer Discretionary sector and the S&P 500’s growth of 14.1% and 6.3%, respectively.lululemon’s 3-Month Performance Image Source: Zacks Investment Research The lululemon stock has outperformed industry peers G-III Apparel GIII and V.F. Corp’s VFC growth of 11.9% and 11.8%, respectively, in the past three months. Also, lululemon has left behind Guess GES, which lost 20.9% in the same period.At its current price of $319.52, the LULU stock trades at a 41.4% premium to its 52-week low of $226.01. Moreover, the stock reflects a significant discount of 38.1% from its 52-week high of $516.39.From the valuation standpoint, the company trades at a forward 12-month P/E multiple of 21.42X, exceeding the industry average of 13.77X. Image Source: Zacks Investment Research The premium valuation suggests that investors have strong expectations for lululemon’s future performance and growth potential. However, the stock currently seems somewhat overvalued. As a result, investors might be hesitant to buy at these elevated levels and prefer to wait for a more favorable entry point.Investment Thesislululemon is navigating several notable challenges. Rising inflation and higher interest rates are dampening consumer spending, particularly on discretionary goods, prompting shoppers to become more selective. These pressures have posed significant hurdles for luxury retail brands, especially in the Americas. Despite this, lululemon is benefiting from its Power of Three X2 growth strategy, which aims to double net revenues to $12.5 billion by 2026, suggesting growth from the $6.25 billion reported in 2021. The strategy also focuses on expanding its presence in underpenetrated international markets and growing its share in the men’s category.lululemon is particularly optimistic about its potential in international markets, notably China, which represents a substantial opportunity. The company plans to quadruple its international revenues over time, with a goal of these markets contributing nearly 50% of total sales. Alongside its physical retail expansion, lululemon is leveraging its digital capabilities to drive sales and deepen customer engagement.ConclusionNo matter how the LULU stock reacts to its third-quarter fiscal 2024 earnings, it remains a solid long-term investment due to its robust fundamentals. With strong profitability and a growing global presence, lululemon offers a compelling opportunity for long-term investors. If you already own LULU stock, hold steady, as the upcoming earnings report is expected to reinforce the company’s strong performance.Free Today: Profiting from The Future’s Brightest Energy SourceThe demand for electricity is growing exponentially. At the same time, we’re working to reduce our dependence on fossil fuels like oil and natural gas. Nuclear energy is an ideal replacement.Leaders from the US and 21 other countries recently committed to TRIPLING the world’s nuclear energy capacities. 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