A Closer Look At Lululemon's Numbers

Lululemon (Nasdaq: LULU), the trendy Canadian yogawear retailer that's taking the country by storm, raised its third-quarter guidance Oct. 26, acknowledging that earnings per share will be in the 17-19 cents range, up from 11-13 cents projected in its Q2 earnings release back in September. Originally expecting flat constant-dollar same-store sales, it now sees high single-digit growth in stores open more than a year. The announcement drove the stock up $2.19 or 8.52% on Oct. 27, just shy of a 52-week high.

While business does appear to be improving, investors interested in jumping on board should take a closer look at the numbers. They're not quite as impressive as a feature article in the Globe and Mail would lead you to believe. Odlum Brown analyst Barbara Gray said this about Lululemon, "Unlike most consumer discretionary companies, which are struggling with lack of demand, Lululemon is in the rare enviable position of having demand exceed supply." I suggest you tread carefully.

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Top Retailers - Sales Per Square Foot

Company	Sales/Sq. Feet Latest Fiscal Year	Sales/Sq. Feet Previous Fiscal Year	% Increase/Decrease
Lululemon (Nasdaq:LULU)	$1,450	$1,700	(14.7%)
Buckle (NYSE:BKE)	$401	$335	19.7%
Aeropostale (NYSE:ARO)	$572	$545	5.0%
Coach (NYSE:COH)	$1,000	$1,000	No Change
J. Crew (NYSE:JCG)	$551	$573	(3.9%)

A Fly In The Ointment
When it comes to sales per square feet, there aren't many retailers better than LULU, not even Coach; and it has pricey handbags to keep the registers ringing. But LULU does have a weakness investors should be aware of, and that's the discrepancy between sales north of the border and in the U.S. In the Q2, for instance, despite having 66 stores in the U.S. to 43 in Canada, Canadian sales were 62% of total revenue compared to 38% in the U.S. On a per-store basis, the Canadian stores generated $1.27 million in the quarter compared to $507,000 in the U.S. That's a 60% difference. The numbers for the Q2 from a year ago were about the same as this year, while the difference in Q1 sales in both fiscal 2009 and fiscal 2008 was approximately 50%. It can keep building stores in the U.S. until the cows come home, but if it doesn't narrow the gap in sales between the two countries, eventually its expansion will come to a screeching halt.

There Is Good News
In Q2 2009, overall company sales grew $12.2 million or 14% year-over-year to $97.7 million. If there wasn't a currency issue to deal with and the exchange rate remained constant, sales would have grown $19.1 million or 22%. Not only that, again using a constant-dollar exchange, its Canadian sales would have grown year-over-year despite adding no new stores in the trailing 12 months. Canada continues to be its go-to market to the detriment of its overall business. If only it could develop the same loyal following in the U.S. that it has in the Great White North, this would definitely be a $30 stock and beyond. As it stands now, we'll need to see how the numbers look when it releases its Q3 earnings in December. We already know they're going to be good, but will they be able to make a dent in the American market, or will there be more of the same? I'm not optimistic.

Bottom Line
Sales per square feet, as the table above demonstrates, can be an extremely deceptive figure. While Lululemon's sales per square feet in its corporate-owned stores dropped in fiscal 2008 from $1,700 to $1,450, its overall sales grew by 30.9% to $353.5 million. The reason for the increase? New store openings. Thirty-seven came on board in fiscal 2008, including 32 in the U.S. Without those, the sales per square feet could easily have been flat or a little above $1,700. However, the important number to watch is the sales per square feet of the U.S. stores. In fiscal 2008, the 30 American stores open for a full year generated approximately $86.5 million in revenue or $1,029 per square foot - at least 40% less than the Canadian average. With a valuation priced to perfection, the sales per square foot had better come in higher at the end of fiscal 2009, or your investment might be in for a rude awakening. (For more, see Analyzing Retail Stocks.)

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