Lululemon Prepares With a Stretch

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In the world of investments, truth be told, a company’ share price is not just dependent on the performance of the business, but more so on investors’ opinion of the stock’s value. The worth of a stock fluctuates depending on investors’ perceptions and their rational and emotional analysis.

A Case in Point

This earnings season, Lululemon Athletica (NASDAQ: LULU), a yoga-apparel maker based in Vancouver, British Columbia, raised its fiscal fourth-quarter guidance, but its earnings per share forecast was just in line with Wall Street projections. Even its optimistic revenue outlook was considered by analysts as short of expectations. Concerns also surfaced when Lululemon initiated post-Christmas markdowns both in its website and in-store. These factors contributed in its share price going down by 6.9% at $67.35 in recent after-hours trading.

Despite some trepidation on the part of investors, however, Canaccord Genuity analyst Camilo Lyons is recommending a “buy” rating for the company as it is scheduled to present at the 15th Annual ICR Exchange Conference next week in Miami, Florida. He said, “We are less concerned by the markdowns as we believe the mix of sale/full price has improved year/year.” As every merchant knows, markdowns is a way for inventory to come down quickly as a set of new and more appealing ones are set to be released. This is a strategy employed by all retail businesses, especially in apparel, as it draws more buyers who have a penchant for quality at a reduced price.

Comparison Against Competitors

Rivals in the athletic-apparel business, such as Bebe Stores (NASDAQ: BEBE), with share price ~$3.90, EPS 0.08, and P/E 48.48 also offered a 30% to 70% discount on selected items in its stores across Dubai during the holiday season. Bebe’s product offerings mostly focuses on clothes that people wear to work, on weekends and when they party, and just a few selections for athletics and yoga.

The Gap (NYSE: GPS) trades around $33.00, has an EPS of 2.04, and P/E 16.09; is a competitor that offers apparel, accessories, and personal care products for men, women, children, and babies under the Gap, Old Navy, Banana Republic, Piperline, and Atheleta brands.  Its inventory is more varied, hence the need to discount its product to clear inventory for new ones. Aside from this, Gap also closes its stores when there are too many in one place.

Lululemon’s stock, which has a P/E ratio of 41.5 and an EPS of 1.61, indicates that it is a more profitable investment. And although these numbers are considered high, most investors look to the price per earnings to growth ratio to measure what they are paying for. Current PEG ratio for Lululemon is 1.3, a ratio that an analyst considers “not excessive, but still suggesting the stock trades at a premium,” and is also an indication of robust growth.

About Lululemon

Lululemon Athletica manufactures, distributes, and sells technical athletics and yoga apparel through 33 company-owned specialty retail locations, primarily in Canada with a presence in the US, Japan, and Australia. Their business, founded to help people to live long, healthy, and fun lives, provides and sells technical athletic clothes not only for yoga but for running, working out, and most other pursuits that make people sweat in comfort and style. Its website posts men’s and women’s athletic wear that are colorful and present a classy and comfortable assortment of products.

 The company’s same-store sales, a key component to watch in retail, has left investors with nothing to complain about since its last quarter growth showed 18% and growth over the past six quarters has averaged 15%. Analysts advise that if that figure starts to slow, then it is time to raise the red flag.

Is it time to raise the red flag? In 2010, earnings per share of Lululemon was $1.69 against its original estimate of $1.05. In 2011, initial expectation was $1.00 but the year finished off at 27% higher at $1.27. In 2012, original estimate was $1.57 and current earnings per share estimate is running at $1.85. The chart below further clarifies:

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>Q4</strong></p> </td> <td> <p><strong>Q1</strong></p> </td> <td> <p><strong>Q2</strong></p> </td> <td> <p><strong>Q3</strong></p> </td> <td> <p><strong>Actual</strong></p> </td> <td> <p><strong>%Above</strong></p> </td> </tr> <tr> <td> <p><strong>2010 Est.</strong></p> </td> <td> <p>$1.05</p> </td> <td> <p>$1.10</p> </td> <td> <p>$1.22</p> </td> <td> <p>$1.41</p> </td> <td> <p>$1.69</p> </td> <td> <p><strong>1<sup>st</sup> Est.</strong></p> </td> </tr> <tr> <td> <p>% Growth</p> </td> <td> <p><strong> </strong></p> </td> <td> <p><strong>5%</strong></p> </td> <td> <p><strong>11%</strong></p> </td> <td> <p><strong>16%</strong></p> </td> <td> <p><strong>20%</strong></p> </td> <td> <p><strong>61%</strong></p> </td> </tr> <tr> <td> <p><strong>2011 Est.</strong></p> </td> <td> <p>$1.00</p> </td> <td> <p>$1.08</p> </td> <td> <p>$1.14</p> </td> <td> <p>$1.18</p> </td> <td> <p>$1.27</p> </td> <td> <p> </p> </td> </tr> <tr> <td> <p>% Growth</p> </td> <td> <p><strong> </strong></p> </td> <td> <p><strong>8%</strong></p> </td> <td> <p><strong>6%</strong></p> </td> <td> <p><strong>4%</strong></p> </td> <td> <p><strong>8%</strong></p> </td> <td> <p><strong>27%</strong></p> </td> </tr> <tr> <td> <p><strong>2012 Est.</strong></p> </td> <td> <p>$1.57</p> </td> <td> <p>$1.60</p> </td> <td> <p>$1.78</p> </td> <td> <p>$1.85</p> </td> <td> <p>$1.87</p> </td> <td> <p> </p> </td> </tr> <tr> <td> <p>% Growth</p> </td> <td> <p><strong> </strong></p> </td> <td> <p><strong>2%</strong></p> </td> <td> <p><strong>11%</strong></p> </td> <td> <p><strong>4%</strong></p> </td> <td> <p><strong>1%</strong></p> </td> <td> <p><strong>19%</strong></p> </td> </tr> </tbody> </table>

Note: Figures adjusted for split

Keeping Fit

Young as the company is, yet they have set the bar in technical fabrics and functional designs that has become popular with an increasing number of yoga enthusiasts, sports buffs and the general public. Lululemon has set the bar and met customer expectations by working with yogis and athletes in local communities for continuous research and product feedback. They really are into their product and that’s a good indication of how serious they are for the long haul. In recognition of their efforts to help America lead healthier lifestyles, NASDAQ has asked them to join in a New Year’s kick off, a part of its 2nd annual NASDAQ “Fit Week,” where NASDAQ-listed companies in the health retail apparel will participate in a week of bell ceremonies.

Is Lululemon a Reliable Investment?

Lululemon’s presence started in Canada and has, since then, expanded into new markets overseas. Its store in Hong Kong has had good results and other expansions are in its planning stages. The company has carved out a niche in the market of athletic brands targeting women and competition will surely come after them to take some of that market away from them. Their game-changing detour from sports apparel to selling yoga essentials and clothing has helped carve this niche and will continue as yoga continues to be known as a better alternative to rigorous physical exercise to keep fit and to de-stress.

With this kind of target market in focus, a consensus among analysts is that Lululemon’s long-term growth is intact and is steadily rising. Like yoga, which aims to achieve truth and unity, this stock is truthfully and unequivocally a steadily growing one.


RhodoraDagatan has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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