Traditional value investors probably didn't like Lululemon Athletica (Nasdaq:LULU) before Friday's earnings report, and they are not likely to appreciate it any more afterward. So, for those who think the secret to successful stockpicking is in targeting single-digit EV/EBITDA ratios, sub-1.0 PEG ratios, or similar formulas, Lululemon just is not going to work for them.

For growth investors, though, this is a name that just keeps delivering the goods. There will be a day of reckoning, a day when the growth disappoints and investors suddenly realize that the low-hanging fruit has been plucked, but that day isn't today and it does not look like it's going to be tomorrow either. In the meantime, aggressive investors may continue to benefit from one of the most dynamic stories in retail.

TUTORIAL:
Exchange-Traded Funds

A Strong Start to the Fiscal Year
Lululemon delivered 35% revenue in the fiscal first quarter, with comp-store sales up 16% in constant dollar terms. Few retailers are approaching this sort of growth these days. That said, it looks like maybe Wall Street has caught up to the name a bit - the company did surpass the average analyst estimate, but not by much and the company definitely did not beat the highest end of the range.

Profitability continues to outpace revenue growth. Gross margin was boosted by 140 basis points from a tax credit, but that still leaves 350 basis points of regular old margin expansion. That's not bad in an environment where retailers left, right and center are worried about production cost inflation. Operating income was likewise strong, as the company reported 59% growth here on the way to an overall earnings beat relative to Street expectations. (For more, see Analyzing Retail Stocks.)

Enjoy the Ride, But Take Note of the Exits
Lululemon is a great growth story today and there are ample opportunities for new store openings and product line expansions. What's more, nothing is quite so irritating as selling a growth stock after a double and then seeing more patient investors enjoy a triple, a quadruple, or so on.

That said, experienced investors have seen this story before. Gap (NYSE:GPS) was once a hot growth stock until it pretty much saturated its market and no longer seemed trendy. Crocs (Nasdaq:CROX) was going to take over the world with its weird foam resin shoes ... until it didn't. Likewise, bebe stores (Nasdaq:BEBE), Chicos (NYSE:CHS), and Under Armour (NYSE:UA) all had their big rises and subsequent falls.

So, it's probably inevitable that Lululemon will stumble at some point and investors will see the stock cut back by at least one-half. The real questions, though, are when that happens and whether the company (and stock) rebound. Lululemon looks far from a point of market saturation, but competition from Nike (NYSE:NKE), Adidas (Nadsaq:ADDYY.PK), Under Armour, and others could begin to bleed away sales well before then.

What should investors do to protect themselves? Keeping a close eye on same-store sales trends and product line expansion is a good starting place; if these metrics weaken, institutional growth investors will flee and the stock will weaken. Investors should also consider a trailing stop loss, which is an order that adjusts as the stock moves up. While selling out on momentary "turbulence" may sound like a curse to a growth investor, suffering a 50% drop is much worse.

The Bottom Line
With many retailers struggling to get customers through the door or opening their wallets once they're inside, Lululemon is truly a beacon in a growth-starved industry. With that growth in place, Lululemon has attracted a shareholder base that just doesn't care about backward-looking metrics. That's fine in a healthy market and/or when company's are in that hyper-growth phase. The problem comes when the market sours on risk or when the company's growth stumbles.

I cannot pretend to know when Lululemon will stumble, so I cannot say growth investors should avoid this name. What I can say is that I've seen this movie before, though, and I know the second act is where the hero finds that the going gets really tough. (For more, see How Far Can Lululemon Stretch?)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Fortinet: A Great Play on Cybersecurity

    Discover how a healthy product mix, large-business deal growth and the boom of the cybersecurity industry are all driving Fortinet profits.
  2. Stock Analysis

    2 Catalysts Driving Intrexon to All-Time Highs

    Examine some of the main reasons for Intrexon stock tripling in price between 2014 and 2015, and consider the company's future prospects.
  3. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  4. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  5. Technical Indicators

    4 Ways to Find a Penny Stock Worth Millions

    Thinking of trading in risky penny stocks? Use this checklist to find bargains, not scams.
  6. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  7. Investing Basics

    Why do Debt to Equity Ratios Vary From Industry to Industry?

    Obtain a better understanding of the debt/equity ratio, and learn why this fundamental financial metric varies significantly between industries.
  8. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  9. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares Morningstar Small-Cap Value

    Find out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Fast Fashion

    Definition of "fast fashion."
  6. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
RELATED FAQS
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!