"The rule is, jam to-morrow and jam yesterday - but never jam to-day." - Lewis Carroll

It's tempting for a company to pull out the stops and grab all the money that it can whenever it can. Smart companies, though, realize that being overly aggressive in the short term can cause bigger problems. To that end, lululemon athletica's (Nasdaq:LULU) decision to focus less on maximizing current sales, in lieu of rolling out fresh product, may be a decision that compromises near-term growth, but keeps the brand healthier over the long term.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers

Torrid Growth Continued in Q1
This retailer has had some of the best growth in the retail sector for a while now, and the fiscal first quarter was no exception. Revenue at lululemon rose 53%, with same-store comps up 25% and e-commerce sales up 179%. Once again, these results were above analyst expectations.

While lululemon had little trouble moving product this quarter, operating leverage was not as impressive. Gross margin dropped more than two points on ongoing inflation in labor and raw materials. Operating income rose 41% for the quarter, though, as the company did claw back most of that lost gross margin leverage through operating expense control.

Manipulating Expectations, or Managing the Brand for the Long Term?
The Street was not all that impressed with management's sales guidance after the earnings report, as management is looking for low double-digit comps for the next couple of quarters. That's not a terrible result, but it does break the beat-raise-revise momentum.

The question is whether or not management is sandbagging (that is, projecting lower growth than they actually expect) or actually engaging in some active brand management. While lululemon has, in the past, scrambled to produce inventory to maximize sales, this time management is focusing more on new product introductions.

In the short term, this basically means willingly creating product scarcity and perhaps even risking sales to the likes of Nike (NYSE:NKE) or Limited (NYSE:LTD). Longer term, though, it should help reduce the risk of brand fatigue - something that has proven problematic for retailers as varied as Limited, American Eagle (NYSE:AEO) and Ann (NYSE:ANN) in the past.

SEE: The Power Of Branding

Still More Room to Grow
Figuring out a retail brand's probable sustainable store base is an inherently subjective exercise, but I think lululemon could still double its store count in the U.S. without risking oversaturation, and that does not include any overseas expansion potential.

While that will probably dent lululemon's exemplary store-level productivity at some point, there would nevertheless seem to be ample revenue growth potential. On top of that, there are additional product categories that lululemon can address to grow its addressable market even further.

SEE: Business Plan: Marketing And Sales

The Bottom Line
The shares of lululemon have never been cheap, but growth stock investors are notoriously disinterested in valuation. The question, though, is how much further growth investors will punish these shares for management's decision to focus on the big picture at the cost of maximizing sales right now.

It's hard to imagine that lululemon shares will sell off enough to get truly cheap, from a fundamental standpoint. Even 30% compound free cash flow growth over the next decade doesn't drive a compelling fair value today. Nevertheless, growth is growth and investors may want to consider these shares, if it retests and holds the $60 level.

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

At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Options & Futures

    Use Options to Hedge Against Iron Ore Downslide

    Using iron ore options is a way to take advantage of a current downslide in iron ore prices, whether for producers or traders.
  2. 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.
  3. Markets

    Why Gluten Free Is Now Big Business

    Is it essential to preserving your health, or just another diet fad? Either way, gluten-free foods have become big business.
  4. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  5. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  6. 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.
  7. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  10. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... 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. 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 >>
  4. 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 >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

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!