Lululemon (LULU) Shares Are Likely to Extend Rally in FY2017 Despite Higher Valuations

Lululemon (NASDAQ:LULU) shares soared 16% in the last three months, extending twelve-month rally to 26%. LULU’s stock price has several positive catalysts that are offering fundamental support to its share price. The company has recently increased its earnings guidance for the second time for FY2016, indicating strong momentum in sales growth and operational efficiencies.

Lululemon now anticipates fourth-quarter revenue in the range of $775M to $785M, signifying a mid-single digit growth. Prior guidance for revenue was in the range of $765M to $785M for the final quarter of FY2016, while the consensus analyst number is $782M. In addition, LULU has also increased its earnings per share guidance to $0.99-$1.10, compared with the recent forecast of $0.96-$1.01.

“We had a strong holiday season in both our store and digital channels driven by our assortment, operational execution and guest experience,” says CEO Laurent Potdevin.

For the full year, the company expects to generate earnings around $2.16 per share, compared with earnings per share of $1.80 last year. A double-digit growth in earnings and a mid-single digit growth in sales will add to the company’s share price potential in the coming months.

Furthermore, it has recently approved a $100 million share buyback program, which will offer additional support to LULU’s stock price. The company’s stocks are currently traded at around $68 a share, significantly lower than its 52-weeks high of $80 a share, representing significant upside potential.

However, the stock looks expensive considering its price to earnings ratio of 33 and price to book ratio of 7.8, compared with the industry average of 23.5 and 5.5, respectively. However, despite higher valuations, Lululemon’s stock price has several positive catalysts, including increasing earnings and strong future fundamentals that could offer significant support to its share price.

The author has no positions in the above mentioned companies.

Alexander is an analyst for who specializes in index and commodity trading. His outlook is usually near-term to medium-term. He has over 10 years of experience in the financial industry and began his career at the dealing desk. Alexander holds a Bachelor’s degree in Economics from University of Delaware.