Lululemon Dives As Q3 Sales Gain Misses

Tallahassee, FL 12/1/11 (StreetBeat) --Yoga apparel retailer Lululemon Athletica (Nasdaq:LULU) said Thursday that third-quarter earnings rose 50% to 27 cents a share, two cents above Wall Street estimates. Sales climbed 31% to $230.2 million, but that missed analyst forecasts for $235.9 million. Same-store sales grew by 16% vs. a year earlier, despite the overall sluggish economy.

The Canada-based chain gave a fourth-quarter profit estimate of 40-42 cents a share on $327 million-$332 million in revenue. Wall Street predicts 41 cents on $327.3 million. The retailer sees same-store percentage growth in the low- to mid-teens.

Shares fell 15% to 42.12 soon after the opening bell, the lowest level since early June.

Lululemon has struggled this year with shortages that forced it to airship in goods — raising costs and leaving future quarters leaner. But heading into Thursday's report analysts think it's largely caught up.

Lululemon's big U.S. expansion in recent years has eased concerns of slowing growth in its home market. The retailer also has tried to diversify beyond stretchy yoga pants and tank tops into running and cycling apparel. It's also trying to appeal more to men. And it's making a bigger online push. But female athletes remain its core customers.

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Lululemon Athletica (Nasdaq:LULU) Issued a Neutral Rating Ahead of Q2 Results

Oxford, MS 9/6/2011 (PennyPayDay) – Believe better inventory position helped to support continuation of robust sales. Lululemon Athletica Inc. (Nasdaq:LULU) is scheduled to report Q2 results before the market open on 9/9 with a call at 9:00 AM EST. The estimate has been $0.22 (vs. $0.15 LY), which is in-line with current consensus. The projection is based on a total sales gain of 35.6% to $206.4 million with SSS +17.0% constant currency vs. a challenging 31.0% LY. On this basis, Retail Metrics consensus is currently at 16.5% and guidance is for a gain in the mid- to high teens.

Management indicated on the prior call on 6/10 that the company was in a better inventory position in Q2 than in Q1, with an inventory injection and dramatic increases in prints and colors, though levels for Q2 were still not thought to be optimal. The company was expected to be in a much better position in Q3, with significantly increased penetration of technical tops and some styling in outerwear, with our research suggesting that levels are in fact running more appropriately in August. Checks suggest that business has remained quite strong in the U.S. through August and positive in Canada, though recent reports from other retailers on Canadian business suggest that trends in the region could be relatively weaker.

FY11 estimates already above the high end of the most recent guidance range. The estimate for FY11 has been $1.10, which is in line with current consensus and above the high end of management's $1.05-$1.08 guidance range. Investors will likely be highly focused in particular on the margin outlook for the 2H, as management had most recently indicated expectations for 225-250 bp of GM pressure from cost inflation partially offset by leverage of fixed costs and distribution efficiencies (leading to a slight decline in GMs for FY11 overall).

Maintaining Neutral rating.

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lululemon Athletica (Nasdaq:LULU): Good Numbers +18%

Lululemon given signs of healthy demand at retail, an aggressive inventory posture and new product introduction strategy, and likely benefits from heightened visibility with prominent exposure on Oprah, we see potential for upside to our 3Q estimates and remain comfortable with our above-consensus 4Q estimates. Our model is for 3Q constant currency comps, revenue, and EPS of 18.5% (16.5% reported), $157.4M, and $0.26, versus consensus for 19.2%, $159.3M, and $0.25.

Aggressive inventory posture, pace of new product introductions in store positions firm well for Holidays, in our view. Our visit to 15 stores over the course of the quarter suggests: 1) Limited discounting within the quarter; 2) Healthy in-stocks, particularly late in the quarter, with store staff noting an uptick in inventory deliveries (and not deceleration of demand); and 3) A solid pace of new product introductions. Our visits to lululemon.com over the course of the quarter suggest limited clearance inventory availability via the "We Made Too Much" section of the site, providing support for our qualitative in-store checks.

Increasing visibility of brand suggests catch-up of U.S. stores to Canada level productivity may be more rapid than we had been anticipating. Given signs of heightened visibility of the concept in the Untied States, as evidenced by the Oprah mention and a 50%-plus uptick in U.S. Google searches for "lululemon" over the prior year this holiday season (source: Google trends), we expect catch-up of U.S. stores to Canada-level productivity could prove faster than we previously anticipated. We currently model for 10% comps at lululemon stores in 2011 and 7.5% comps in 2012. This is well above our expectation for 3-5% industry growth in the apparel market over the next 2 years. Our model suggests that Canada generates $6.6M in revenue for each store in the region, while the United States only generates $4.7M in revenue for each given store.

Remain concerned that current valuation sets the bar too high for 2011 performance. While we remain compelled by the potential for sustained door expansion and comp store sales growth, we are challenged to justify current valuation, which implies 36x our above-consensus EPS estimates for $1.53 (consensus $1.47). In our view, support for shares at (or above) current levels, would require FY11 EPS approaching $1.75 (assuming a 32.5x multiple is sustainable,) requiring 15-20% comps and 100-150bp of operating margin expansion. We view this as unlikely given: 1) more challenging comparisons; 2) rising product costs, which are likely to pressure initial margin; 3) high likelihood of accelerated (initially dilutive) store openings; and 4) required investments in infrastructure and headcount.

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