Lululemon 'Disappoints;' Under Armour Looks Worse

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Athletic retailer Lululemon (NASDAQ: LULU) raised its fourth quarter guidance yesterday, but not as much as the Street had hoped for, as shares have been tumbling since. The firm announced its revenue is likely to be $475 million to $480 million, the high end of its guidance range, but below the consensus estimate of $489 million. Same-store sales guidance of high-single-digit growth was reiterated (consensus was at 10%), driving earnings per share of $0.74—above the firm’s prior guidance of $0.71-$0.73 and equal with consensus.

In the view of our team at Valunetum, the stock’s move to the downside was an overreaction, but understandable. Given the company’s lofty valuation, we think market participants are looking for any weakness to close a long position in the company or short the stock. Athletic apparel peer Under Armour (NYSE: UA) has seen similar pressure on its shares, though we think its recent underperformance is much more specific.

Under Armour, unlike lululemon, isn’t a cash-rich business; thus we think the firm is dealing with a variety of headwinds. For one, weather in the US has been relatively mild--much like last year. A great deal of Under Armour’s business relies on the weather to drive sales, so mild weather deters sales of its cold gear products. Additionally, the company continues to struggle with its footwear products, missing a huge tailwind in the basketball shoe market that has been powering the footwear business of Nike (NYSE: NKE) and Foot Locker. Its flagship model for the current season looks like a bust, and it has received fairly negative reception outside of the company’s internal review system. The shoe shown below is not selling well (Image Souce: Under Armour).

<img height="442" src="/media/images/user_12958/ua_pic_shoe_large.jpg" width="470" />

Under Armour is better in the running shoe market, but recent results from both Finish Line and Nike suggest that the market is “flattish” right now. Getting a great basketball product out for calendar fourth quarter 2012 and first quarter 2013 was a huge opportunity the company fumbled. Nike, on the other hand, has capitalized with better supply-chain management and a blockbuster lineup of releases, which included the most popular Jordan Retro in history, and the newest signature products from LeBron James, Kobe Bryant, and Kevin Durant.

The fundamentals of Lululemon, on the other hand, continue to look strong, though growth is certainly decelerating, as it eventually had to. A high-20% revenue growth rate is nothing to look down upon in an overly challenging consumer environment. Eventually, this figure will slow, but we think the company could successfully enter Europe, and someday China. Management also noted that the current gross margin is better than planned, suggesting the company hasn’t cut prices to move excess inventory. CEO Christine Day noted that new spring inventory is getting ready to hit stores, and that its “back to gym” product is also fresh.

Overall, we at Valuentum think 2013 looks promising for lululemon, but shares of the apparel company are fairly valued. Under Armour’s 2013 looks murky at best as the North American growth runway is getting shorter, and the company still has virtually no international presence. Shares of Under Armour don’t look compelling, in our view. Overall, we think most names leveraged to the US athletic apparel market, including Nike and Dick’s Sporting Goods look fairly valued. We see some potential upside at footwear retailer Finish Line, but it could take several quarters for positive catalysts to materialize.

Valuentum has no position in any stocks mentioned. RJ Towner owns shares of Finish Line. The Motley Fool recommends Lululemon Athletica, Nike, and Under Armour. The Motley Fool owns shares of Nike and Under Armour. 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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