Filed Under:
Tickers in this Article: LULU, NKE, UA, ANF, JCG
After tumbling more than 62% so far this year, shares of Lululemon Athletica (Nasdaq:LULU) rallied more than 21% late last week. So, what prompted this dramatic about face for this maker of pricey Yoga-inspired activewear? And, more importantly, is a sustainable recovery in the company's share price now underway?

Earnings Surprise Prompts Bullish Shift
In the case of Lululemon, the catalyst for the sharp price move was a better than expected quarterly earnings result that prompted a number of positive calls from analysts covering the company. For the 13 weeks ending August 3, the company reported that it had managed to double its earnings to $11.1 million, or 16 cents per share, compared with $5.1 million, or 7 cents a share for the same period a year earlier. (For more on analyst expectations, read Analyst Recommendations: Do Sell Ratings Exist?)

Revenue was also sharply higher, rising 48% to $85.5 million. Sales at stores open for a least a year, a key gauge of retail health, rose by 13% on a constant dollar basis. The company also reiterated its positive mantra for the balance of the year by maintaining its full-year forecast for diluted earnings per share of 68-71 cents on revenue of $380 million to $385 million.

These surprisingly strong numbers were well ahead of analysts' expectations who had earlier forecast earnings would not top 13 cents per share on revenues of $88.2 million. That prompted a couple of initial recommendation changes; one by Canadian broker BMO Capital, which upgraded Lululemon to 'outperform' from 'market perform' while maintaining a $26 target price, and another by U.S. investment dealer Thomas Weisel, who continued to maintain its 'overweight' call on the stock, but drastically revised its target price lower from $43 to $30. This seems to be more as a concession to the current unsettled nature of equity markets than a negative on the company itself. (Learn to make your own analyst predictions on companies like Lululemon, in our related article Analyzing Retail Stocks.)

Yoga Chic Still Works
A pair professional observers reiterated their belief in the Lululemon story, but is that enough to convince investors that the company can keep its revenue and earnings momentum going? The U.S. consumer appears to be facing even tougher times. The key point here, however, is that the company's story has little to do with the average US consumer.

According to the online musings of company founder and Chairman Dennis "Chip" Wilson, the company's success over the years has been due to its ability to tap into what he describes as the "Super Girl" market: educated, health conscious women, who embrace yoga and athletics as a path to less stressful life, while at the same time wanting to look and feel feminine. It's a narrow niche market play, but as the latest numbers suggest, there's no evidence yet that the company's well heeled clientele are unwilling to shell-out a hefty $92 dollars for a pair of lulu workout pants compared with the $60 they'd pay for a similar pair made by Nike (NYSE:NKE), or $70 offered by Under Armour (NYSE:UA).

This "yoga chic" not only allows the company to sell its products at a premium price point, but keeping sales volumes high as well. The company manages to sell $1,710 worth of gear per square foot of retail space. That's about three times the rate of other upmarket retailers like Abercrombie & Fitch (NYSE:ANF) and J. Crew (NYSE:JCG).

Right now Lululemon has 92 stores in operation, up from 60 last year, and plans to open another 35 in North America.

The Final Word
After last week's price spike, it's reasonable to expect a bit of a pullback in the shares. However, fears that the company's business model may be built on an unsustainable fad have yet to gain any traction as the company's growth momentum remains intact. Seems there are a lot of Super Girls out there.

comments powered by Disqus

Trading Center