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Mrinalini Chaudhuri
Mrinalini Chaudhuri
Articles (506) 

Lululemon Is a Buy

Company posted strong third quarter with updated guidance

December 08, 2016 | About:

Lululemon Athletica (NASDAQ:LULU) posted strong third-quarter results on Dec. 7. The company beat on revenue and has updated its guidance. Its top-line momentum is strong and it increased its margins.

The company has taken several steps to enhance profitability. The athletic apparel industry is dynamic, making competition tough. The industry is affected by seasonality as well. Sales tend to soar during the holiday season. So, we can expect a spike in sales during the end of the fourth quarter.

Lululemon is constantly focused on building its brand image. Digital and international expansion is in the cards. The company is growing on a rapid pace and is positioned for future growth. The company is engaged in manufacturing athletic and yoga apparel for men and women. Every week, the stores temporarily tranform into a yoga and fitness studio.

Strong third quarter

Lululemon’s third-quarter net revenue increased 13% to $544.4 million, up from $479.7 million a year ago.

Diluted earnings per share during the third quarter increased by 12 cents to 50 cents, up from 38 cents in the same quarter a year ago.

There was a 24% increase in gross profit to $278.4 million.

The company’s current liquidity position seems strong. Cash and cash equivalents stood at $480.4 million as at the end of the current quarter, up from $403.4 million last year.

For comparable-store sales, there was an increase of 4% from the prior year quarter.

Effective tax rate during the quarter was 27.0%, up from 18.6% a year ago.

Income tax expenses for the quarter was $25.3 million, up from $12.1 million the year before.

Income from operations during the quarter was $93.0 million, marking a 36% increase from $68.2 million last year.

Share repurchases

The board approved a stock repurchase program for up to $100 million of its common shares.

Store update

As at the end of the third quarter, the company had 389 stores.

Guidance

 

Fourth Quarter

Full Year

Net revenue

To be between $765 million-$785 million

To be between $2.320 billion-$2.340 billion

Diluted earnings per share

To be between 96 cents-$1.01

To be between $2.18-$2.23

Tax rate

To be around 31.2%

To be around 28.2%

Strong attributes of the quarter

  • Strong top line
  • Accelerated gross margin
  • Strong comparable-store sales

Focus

  • Increasing revenue
  • Expansion in North America
  • Innovation
  • Increasing global presence through the opening of stores in Asia and Europe
  • Product design and development

Conclusion

Strong momentum and better guidance is going to take the stock higher. The company is committed to long-term strategies of increasing returns. The stock looks positive if you go by the year-over-year results. It reported sales growth of about 13% from the prior year quarter. There was also an increase in direct to consumer net revenue of 16%. It stood at $104.0 million.

The company plans to double its earnings and revenue by the end of 2020. Given its present momentum, it is on track to deliver to investors. The brand is quite popular among women consumers, which contributes to the brand’s success. Last, but definitely not least, the rising levels of disposable income. People do not hesitate to invest more for their comfort. Offering stylish and comfortable clothing is the brand's ultimate selling point. It has started catering to the men as well.

Though it faces stiff competition from other established brands, Lululemon has created a niche for itself in the activewear market due to its product designs. The company is continuing to develop its products strategically and has been consistently creating shareholder returns. This Canadian athletic apparel retailer is performing very well. With the recent results, I think the company is going to create shareholder returns. Lululemon is a buy.

Disclosure: I do not hold any position in the company.

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Rating: 3.0/5 (2 votes)

Voters:

Comments

Roger Stera
Roger Stera premium member - 3 days ago

Thanks for the article.

$LULU is not a real buy, unless you want to spend more money than necessary.. leaving you with a less than potential performance on your investment.

Why? In my opinion $LULU is a beautiful and healthy company (no debt!) but please don't forget that these are still commodity products in a very competitive environment. As the management states in their latest financial report :

We operate in a highly competitive market and the size and resources of some of our competitors may allow them to compete more effectively than we can, resulting in a loss of our market share and a decrease in our net revenue and profitability.

Currently its price is US$ 53.27 which is overpriced if you ask me. A FCF/DCF will show about US$ 63 but I won't rely on these FCF projections since you're dealing with a retailer and decreasing operating margins since 2014 (2014: 24.60% to 2017: %17.96).

A quick 'n' dirty asset reproduction value gets me towards US$ 12.63, and when calculating the Earnings Power Valuation I get around US$ 45.31. No margin of safety exists here.

Don't get me wrong here. It's a great company, so if you're into growth companies in the retail/sport apparal industry, then give it a shot. I'd wait for Nike ( $NKE ) and put some money in this stock when it is attractive. Just wanted to put some light on alternative aspects.

Keep up the good work!

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GuruFocus has detected 3 Warning Signs with Lululemon Athletica Inc $LULU.
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