Needham positive on Lululemon heading into tomorrow's earnings report

Investing.com -- Needham&Company analysts remain positive on Lululemon (NASDAQ:LULU) ahead of its fourth-quarter earnings report, set for release after the market close on Thursday. 

The firm believes recent trends have improved despite concerns about a post-holiday slowdown.

"After a post-holiday lull, we believe trends have improved alongside warmer weather," said Needham. 

The firm noted that Google (NASDAQ:GOOGL) searches for Lululemon products grew more than 20% year-over-year last week, while the number of discounted items in Lululemon’s "Made Too Much" section has dropped by approximately 25% since early January. 

This improvement is said to align with Lululemon’s U.S. turnaround strategy, which focuses on increasing seasonal newness.

Needham believes that if demand continues to pick up as spring selling accelerates, it would validate the company’s strategy. 

"If LULU can follow up a strong holiday season with a strong transition to spring selling, we think that is far more indicative of the health of the business than a slowdown in Jan/Feb," the firm stated.

Needham also sees little risk to Lululemon’s initial FY25 guidance, saying, "Street estimates are reasonable, and we don’t see downside risk." 

Needham expects low-single-digit comparable sales growth in the Americas and a slowdown to 10%-15% international growth, compared to 20%+ in prior quarters.

Additionally, Lululemon faces minimal tariff exposure, as only 3% of its goods are sourced from China, according to the firm. 

"As a result, we think there’s minimal EPS risk to LULU (<1% of FY25E EPS) based on already-announced tariffs," said Needham.

Needham lowered its price target to $430 from $475 due to a more conservative valuation multiple but still views the stock's risk/reward favorably heading into earnings.