Lulu Love

By Eugene Bukoveczky | June 18, 2009 AAA

Following the release of its latest quarter results, trendy yoga-inspired apparel maker Lululemon (Nasdaq:LULU) saw its shares sell off more than 12%. But despite this negative reaction, an analyst from Goldman Sachs upgraded the stock to "Buy" from "Neutral". Is there something in these results that is getting lost in translation for the average investor?

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Better Than Expected
For starters, despite being down from the same period a year earlier, the top and bottom line numbers actually beat expectations. Despite a same store sales slump of 8%, earnings per share came in at 9 cents and revenues rose 6% to almost $82 million. That was slightly better than the 8 cent profit on revenues of $74 million that analysts had been expecting.

The strong revenue number was a positive surprise mainly because the company has so far managed to avoid having to discount its merchandise like so many other players in the apparel business. Seems the brand still has enough fashion cachet with its young affluent female target market to see them paying $100 or more for a pair of the company's signature yoga pants.

Getting Its House In Order

Additional positives can be gleaned from a look through the company's 10-Q filing. Tougher trade conditions appear to have prompted some significant internal operational improvements. Expenses in the latest quarter fell by 14%, dramatically improving the expenses to revenues ratio from 37.9% to 30.7%.

The company also upped its game in inventory management. Inventories fell by about 14%, generating another $8 million in cash and raising the company's total cash hoard to over $59 million. That's more than sufficient to fund capital expenditure levels, which at just over $2 million for the quarter are now roughly one-quarter what it was a year ago. Lulu continues to have no debt on its books. (Learn how to evaluate whether a company's debt will pose a threat to investors. Read When Companies Borrow Money.)

On the negative side, the company has not been completely immune to the sales slump affecting the entire apparel segment. Same store sales, a key measure of retail health, were down 8%, on a currency-adjusted basis during the first quarter.

As the company now looks like its shifting to a less growth-oriented strategy (no new stores were opened during the quarter), same store sales will be a closely watched number in coming quarters, especially the fiscal fourth quarter during which the company makes the bulk of its sales.

Sporty Apparel Continues To Sell
But there are signs that the sports apparel segment could be due for an upswing. Nike (NYSE:NKE) shares were recently upgraded on the view that the company is likely to report strong international sales, partly due to a weaker U.S. dollar.

Earlier this year, technical sports apparel maker Under Armour (NYSE:UA) reported stronger than expected sales, largely at full price. And last month, casual apparel maker Iconix (Nasdaq: ICON) raised its 2009 earnings guidance from $1.30 to $1.35 per share compared with consensus expectations of $1.17. All this suggests that casual sporty wear is still selling well.

The Bottom Line
Internally, Lulu is in better shape than it was a year ago. That should help boost the bottom line by a better-than-expected amount even if sales just stay on track during the all-important fourth quarter. (Read Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks)

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