Lululemon's outlook puts investors on edge

Lululemon symbol (David Bloom/QMI Agency)

Lululemon symbol (David Bloom/QMI Agency)

Allison Martell, REUTERS

, Last Updated: 6:03 PM ET

Lululemon Athletica Inc. said on Thursday it expected the blistering sales growth of its trendy yogawear shops to retreat in the current quarter, sending its volatile stock tumbling anew as investors again questioned its lofty valuation.

The Vancouver-based company, already a fashion phenomenon in its home market of Canada, is rapidly expanding in the United States, targeting its yoga gear and running apparel at young, professional women willing to pay premium prices.

While reporting a 25% sales increase for established stores in its first quarter ended April 29, Lululemon said growth in the current three months would likely ebb to a percentage in the low double-digit range.

Any sign that the chain’s muscular growth might falter has spooked markets in recent quarters, and this time was no different. The stock dropped 9.3% to $65.34 on Thursday afternoon on the Toronto Stock Exchange, though it is still up nearly 40% this year.

“It trades at a high multiple, it’s a big growth story,” said Sterne Agee analyst Sam Poser. “The Street got ahead of them, including myself, and you know, if it’s not perfect, these stocks get hurt.”

Lululemon, a rare Canadian retail success story in the U.S. market, inspires fierce brand loyalty, with fan blogs tracking every product launch. Bu t with a rich valuation, its stock has been subject to sharp shifts in sentiment.

The company is trading at about 39 times analysts’ expectations for fiscal 2013 earnings, according to Thomson Reuters data, much higher than its competitors. Nike Inc is at about 19 times forward earnings, and Under Armour Inc. is at 33.

Indeed, compared with similar stocks , a higher-than-average number of investors are betting Lululemon shares will fall. At the end of May, 10.8% of the company’s free float was being borrowed for short sales - essentially a bet the stock will fall - according to data from Nasdaq.

While that’s down from 14.9% at the beginning of the year, Lululemon still ranks in the top fifth of all U.S. stocks in terms of short interest, according to Starmine.

'GROWING PAINS'

Brian Sozzi, chief equities analyst at NBG Productions, said the company’s outlook was a little disappointing, though he noted that it tends to guide conservatively. But he did see some signs of “growing pains.”

“They’re putting more costs behind their product, and if you look at some of the new releases on the site, there’s just a lot of embellishment, and I don’t know if the consumer is willing to pay some of the prices I’m starting to see,” he said.

As Lululemon expands outside of yoga to running and other activities, it will compete more directly with Nike and Under Armour, which in many cases can offer lower prices, Sozzi said. He also highlighted lower margins and inventory growth, which outpaced established-store sales.

The constant-dollar 25% same-store sales increase beat the company’s forecast for a gain in the low 20s. But inventory at the end of the first quarter was $107.7 million, compared with $64.4 million at the end of the same quarter last year.

For his part, Poser is not worried about inventory, given how quickly Lululemon churns through product.

Last year, Lulu’s premium yoga pants and other products sold faster than it could restock, holding back overall sales. The company has said repeatedly that its now-higher inventory helps boost sales because it has the goods on hand to meet the specific tastes and size requirements of customers.

MARGINS SHRINK

First-quarter net income rose to $46.6 million, or 32 cents a share, from $33.4 million, or 23 cents, a year earlier. Analysts, on average, had expected earnings of 30 cents a share.

Net revenue jumped 53% to $285.7 million, compared with the average forecast of revenue of $270.9 million.

Gross profit margin fell to 55.0%, from 58.7% in the year-earlier quarter. Chief Financial Officer John Currie said on a conference call that margins were hurt in part by higher labor and raw material costs, and more markdowns.

Currie said a 45.1% increase in selling, general and administrative expenses was due in part to higher store labor and operating costs, and higher costs in store “support centers,” including salaries.

Poser said those expenses were much higher than he had expected, but said the business is still sound.

Second-quarter outlook for revenue and earnings came in below expectations. The company forecast net revenue from $273 million to $278 million, compared with an average $289.8 million expected by analysts, according to Thomson Reuters.

It saw earnings from 28 to 30 cents a share, below the average forecast of 33 cents a share.

At the end of the quarter Lululemon had 180 stores in North America, Australia and New Zealand, up from 174 in January.


Videos

Photos