"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.
Mutual Funds & ETFsLearn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
Investing NewsWill Ferrari's shares move fast off the line only to sputter later?
Stock AnalysisHere are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
InvestingThe further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
Fundamental AnalysisOptions market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
Stock AnalysisCan these two oil stocks buck the trend?
Investing NewsAlcoa plans to split into two companies. Is this a bullish catalyst for investors?
EconomicsDiscover the four countries in the world that manufacture the largest amount of chocolate and learn basic facts about the chocolate industry.
Stock AnalysisIf you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
Investing NewsA rate hike would certainly alter the investment scene, but would it be for the better or worse?
When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
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 >>
A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
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 >>
The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>