by Jeff Reeves | June 7, 2012 9:46 am
There aren’t a lot of growth stories on Wall Street these days. So when you see a stock posting numbers like Lululemon Athletica (NASDAQ:LULU) is Thursday morning, investors should take notice.
The high-end athletic clothing store — best known for its yoga pants — just posted its 13th consecutive quarter of sales growth and 11th consecutive quarter of profit growth.
Despite those numbers, LULU stock tanked as much as 14% before the bell. That’s partially because of some disappointing details about future projections — but mainly about the fact that investors have almost no stomach for risk. Even when it involves a stock with a great track record like Lululemon.
Let’s go over the earnings details first before I wax philosophical about investor appetites for risk and expectations of growth:
Just look at the LULU earnings details for a moment, and tell me if you spot any warning bells.
Revenue was $286 million on the quarter. That’s up 56% from Q1 last year, and more than double sales from two years ago. In fact, this one quarter of revenue is more than the company did in all of fiscal 2008. And same-store sales — an all-important measure of performance at older locations open for at least a year instead of new locations that have some buzz — were up 25%.
It’s not just sales at Lululemon, either. Earnings were up 40%, from $33.4 million to $46.4 million the previous year. On a per-share basis, that was a jump from 23 cents to 32 cents. And longer-term, that’s bigger EPS than the company recorded in all of 2009. To top it off, Wall Street had forecast only 30 cents a share in profits, so the 32-cent total handily beat expectations.
Not exactly reason to panic, right?
Well, unfortunately, investors latched onto two items with utter disregard for everything else. The company predicted that same-store sales growth would slow to the “low double digits” in the current quarter and into the future. Also, LULU noted full-year profit in fiscal 2013 will be as much as $1.60 per share compared with the average forecast of $1.63.
In short, Lululemon might be growing at a fast pace. But for some investors, it’s not growing fast enough — and that means it’s time to bail out.
Click to Enlarge Back on Dec. 1, we saw a very similar script play out. LULU “only” grew its revenue 30% and its earnings 16%. The stock gapped down almost 19% at the open as investors freaked out — going from a close of $49.70 the day before to an opening price of $41.94.
Except by the end of the day, it had run back up to a close of $47.80. One month later it was above $50, and it had been trading above $70 before the mayhem this morning. That’s a roughly 40% gain from that “horrible” report in December.
We could see another sideways move in Lululemon for a few weeks as some investors cash out their positions. After all, the stock is up nearly 1,700% since early 2009, so you can hardly blame traders looking to take some money off the table. But just because those big gains are behind us doesn’t mean LULU has run out of room. There very well could be a decent gain in the coming months — because a “low double-digit” growth rate right now still is a growth rate, as opposed to the headwinds other companies are facing.
The company has a 52-week high of $81.09 — over 25% upside from here if all LULU does is reclaim that level. The mean price target on Lululemon right now is $79.20, according to 15 analysts surveyed by Thomson/First Call, and the median target is $83. So that’s not an unrealistic expectation.
Of course, that’s presuming the forecasts don’t turn even further south. There is a serious risk to high-end retailers if the global economic slowdown persists. In fact, Keybanc Capital Markets recently downgraded LULU out of fears that consumers will be going on the defensive and discretionary purchases like yoga pants will take a hit.
“We do have some concerns that the U.S. luxury consumer may be slowing,” Keybanc wrote to clients on May 24 regarding Lululemon, which is now rated a hold at the investment firm. “While we understand that the demand dynamics between high-end jewelry and activewear are not the same, we do believe that global economic issues do have a more profound impact on the affluent U.S. consumer.”
Know these risks, and protect yourself if you’re bargain hunting.
The trouble with LULU — and, bluntly, the entire market right now — is that even a successful growth story is overshadowed by fears of a downturn.
Yes, we can get lost in the specifics of Lululemon earnings and perhaps even talk ourselves into why the growth story will persist. But at the end of the day, that doesn’t matter. All the market cares about right now is the fact that Europe’s debt crisis remains shrouded in uncertainty, China is showing signs of slower growth and the specter of a “double-dip” recession in America is looming large after a rather lousy jobs report last week.
Treasury yields briefly hit an all-time low because investors are just plain scared of stocks, no matter what the fundamentals are. Traders are going to cash and checking out for the summer.
And who can blame them?
The story here is partially that LULU is a momentum stock, and these high-growth investments can turn in a hurry once the promise of future gains becomes less impressive. But bigger picture, this is a story of how investors don’t trust the market, and don’t want to stick their necks out and take on any more risk than they have to.
Lululemon might not be slowing down and could very well be oversold today as panicky investors run for the exit. But does that mean it’s a bargain? Maybe not. Because even if LULU can get its swagger back in a few weeks and prove its growth story is still real, it’s a very tall order to convince folks to overlook the bigger market risks that are looming large right now.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace??.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the stocks named here.
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