Bear of the Day: lululemon (LULU) - Bear of the Day

By Zacks | Updated July 30, 2014 AAA

lululemon athletica inc. (LULU) is struggling to turn it around after a PR fiasco surrounding its most popular yoga pants sent sales into a tailspin. This Zacks Rank #5 (Strong Sell) is expected to see negative earnings growth for 2014.

lululemon operates retail stores which sell yoga-inspired clothes and accessories in Canada, the U.S. and Europe. It sells one of the most popular women's yoga pants on the market.

Was There a Turnaround?

On Mar 27, lululemon reported fourth quarter and fiscal 2013 results and beat the Zacks Consensus by 3 cents. Despite its recent troubles, lululemon has managed to string together 5 years worth of consecutive earnings surprises, which is impressive.

However, the holiday quarter was a tough one for many retailers due to excessive promotions and extreme North American weather and lululemon was no exception.

lululemon's comparable store sales fell 2% year over year. But a bright spot was in the total comparable sales, which includes direct to consumer sales. Total comparables rose 4% in the quarter as direct to consumer revenue increased 25% to $97.8 million.

Direct to consumer accounted for 18.8% of the company's revenue in the quarter, up from 16.1% of company revenue in Q4 of fiscal 2012.

Fiscal 2014 = Investment Year

lululemon has a new CEO in Laurent Potdevin. He needs time to turn things around.

In the fourth quarter earnings press release, he described 2014 as an "investment year" but pledged continued global expansion.

The company provided earnings per share guidance in the range of $1.80 to $1.90. That was well below the Zacks Consensus of $2.19.

Not surprisingly, analysts moved to cut their estimates. 18 estimates have been lowered for fiscal 2014 pushing the Zacks Consensus down to $1.87.

That is negative 2% earnings growth as lululemon made $1.91 in fiscal 2013.

Analysts are also bearish on 2015 as 12 estimates were also lowered in the last week for that year.

Shares Are Not Cheap

While shares have come down well off their highs over the last year, they're not exactly cheap.

lululemon still trades with a forward P/E of 27. It has always traded with a high P/E multiple but investors were willing to pay a higher price for double digit earnings growth. Right now, that earnings growth is missing.

That makes shares pretty pricey at these levels.

The Zacks Rank is a short-term recommendation of just 1 to 3 months. It doesn't take into account things like a company having an "investment year" before it turns it around.

If you're set on investing in a retailer right now, you might want to consider Foot Locker Inc. (FL). It's a Zacks Rank #2 (Buy) and is expected to grow earnings by 11% in fiscal 2014.

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Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Insider Trader and Value Investor services. You can follow her on twitter at @TraceyRyniec.

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