Lululemon Talks A Good Game

By Will Ashworth | January 03, 2011 AAA

Christine Day, CEO of Lululemon (Nasdaq:LULU), had nothing but good things to say December 9 in the company's third-quarter press release. And why not; it was another analyst-beating masterpiece. The stock is firing on all cylinders, with some now calling for triple-digit prices. Could it be the next Decker's (Nasdaq:DECK)? It's quite possible, but first it needs to become a little more candid, not to mention consistent, in the way it presents its financial numbers. Although it talks a good game, investors are still being left in the dark on occasion, and eventually, if it doesn't change its ways, these omissions are going to come back to bite them you-know-where.
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Sales Per Square Foot
In the past five quarters, Lululemon's mentioned this all-important key performance indicator in the text of its quarterly earning's release just twice. Conveniently, on both occasions, the number was extremely positive. Given the good results this past quarter, I doubt anyone noticed the company omitted the figure in its earnings press release. Care to guess why the figure went missing? It's possible it was an accidental omission, but a more plausible explanation is that the number was noticeably lower than the $1,532 highlighted in its Q2 release. If it was higher, you can be sure it would have been included.

A Questionable Answer
It's doubtful that there are many people who read the transcripts of conference calls, but for those who do, perhaps you noticed a question in the Q3 call from Tracy Cogan of Nomura Holdings (NYSE:NMR).

She posed, "Looking at your fourth-quarter guidance, it seems like you're looking for a spread of 15 points between total sales growth and comp growth, and I'm wondering what the driver is behind that being so much lower than the 27 point spread in Q3?" John Currie, the company's chief financial officer, answered that e-commerce is partially responsible for the decline, as well as the now-included Australian stores. Cogan responded to Currie's answer by asking why it would it be so much lower than the spread in Q3, unless the growth in either of those categories is expected to be lower.

Firstly, e-commerce (part of the non-store business) would increase the spread, not decrease it. Secondly, adding Australia's numbers should result in both the numerator and denominator increasing, ultimately having little affect on the spread. I'm not an accountant - but Currie is, and he should have known the answer to this question. Clearly, Cogan was trying to get an admission from Currie that the fourth quarter wasn't going to be nearly as positive as the third. We'll probably never know the answer to this, but it's another example how Lululemon controls its story to the detriment of investors. Candid, it is not.

U.S. Stores
The only information investors are provided on this subject, regarding the company's business in the U.S., is the recognition that it does a certain percentage of its overall revenues south of the border. In the most recent quarter, it was 45%. Other than that, we're out of luck. Both Nike (NYSE:NKE) and Under Armour (NYSE:UA) provide almost as much information about their retail efforts, and they're primarily wholesale.

Nonetheless, a quick look at third-quarter revenues for 2009 and 2010 shows that its corporate-owned American stores grew by 68.5%, or approximately $26.2 million year-over-year. On the surface, that's great. But when you consider that it added nine stores over the past year, it works out to $354,000 per store. The Canadian locations, which are farther along the growth curve, averaged $326,000 per store. Therefore, while it's true the American stores are growing faster than their Canadian counterparts, they're doing so at a pace nowhere near what the Canadian stores did when they were younger.

The Bottom Line
Lululemon's been touting its higher priced Silverescent products (they don't smell due to silver in the thread) recently, as a new line of clothing that's a hit with customers. The only problem is they aren't exactly new. The company's been pushing the fiber since as far back as 2006. Personally, I'm all for anything that eliminates unwanted odor, but investors ought to know this isn't new technology, and the company hasn't invented a miracle drug. This is just another example where Lululemon talks a good game. Unfortunately, talk is cheap. (To learn more, see Analyzing Retail Stocks.)

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