Profit rose to US$38.8 million or 27 cents per share, up from $25.7 million or 18 cents per share in the same quarter a year ago. Revenue gains were 31% from a year ago to $230.2 million.
Since the results appear quite strong, why were shares of LULU punished?
We warned about the downside risks to LULU three weeks ago in our column "LULU Shareholders Should Be Nervous." Perhaps "panic" would have been a more appropriate word than "nervous."
Let's dissect the earnings and see if there is any more room on the downside.
The most likely reason why momentum traders bailed on LULU is that sales are not growing fast enough.
We previously outlined that competition is ramping up in yoga apparel. Weakness will show up in slowing sales and operating margins.
In the latest quarter, sales at established stores rose 16%. However, in the previous quarter same-store sales growth was 20%.
Furthermore, the company forecast that sales growth would be low to mid-teens for the current quarter.
Even dim-witted momentum traders will not want to pay 50x earnings for a company with 15% sales growth as sales growth begins slowing sequentially.
Secondly, LULU appears to have a lot of unsold inventory that may have to be sold at discounted prices (further compressing margins).
Inventories in January 2011 were $57,469,000. Currently, inventories have swelled to $129,169, 000.
In other words, inventories rose by 126%. However, sales growth in the last year was 35%. Inventories are growing at almost 4x the rate of sales. This does not bode well for operating margins going forward.
Is it possible that stretched U.S. consumers are having a difficult time justifying $100 yoga pants?