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Now that we’re in the thick of the holiday shopping season, it’s game time for apparel gurus like Lululemon Athletica (LULU). However, Thursday morning shares plunged over 8% after the company released third-quarter earnings results. Are investors overreacting to the news, or is the company truly in downward dog?
Find out now.
Lululemon Athletica creates high-end athletic apparel designed for runners and yoga buffs who like to look good while they sweat. It got its start 15 years ago in a yoga studio in Vancouver, British Columbia. Although it has since expanded to over 226 stores across North America and Australia, Lululemon maintains strong local connections by offering free workshops and yoga classes in their stores.
In the third quarter, the company brought in $379.9 million in sales, a 20% jump from the $316.54 million in sales reported in Q3 2012. Analysts forecast revenues of $376.2 million, so Lululemon beat the consensus estimate by a whisker.
During the same period, earnings climbed 15% to $66.11 million. Earnings per share came in at 45 cents per share, which topped the consensus estimate of 41 cents per share by 10%. Despite these sales and earnings surprises, shares of LULU plunged after management issued a weak outlook for FY 2013.
Lululemon currently anticipates full-year earnings in the range of $1.94 to $1.96 per share, on the lower end of the $1.96 consensus estimate. The company also expects annual revenues between $1.605 billion and $1.61 billion, well below the Street view of $1.64 billion in sales.
Lululemon’s service is clearly more personal and specialized than Nike (NKE) and Under Armour (UA), which are its top competitors. But there is a widening gulf between the performance of trendy retailers like Lululemon and its lower-priced competitors.
So both Nike and Under Armor are enjoying stronger bottom-line growth; analysts expect both companies to post double-digit annual earnings growth while Lululemon is headed towards just 5.1% annual earnings growth. Couple this with better buying pressure (NKE receives an A for its Quantitative Grade while UA receives a B), and it’s clear which of these three rivals is outpacing the rest. Both NKE and UA are currently B-ranked buys and as I’ll discuss shortly, LULU is a D-ranked sell.
Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. This time last year, LULU was a B-rated buy. Since then, institutional buying pressure has fallen off a cliff.
What happened? Well, the company struck out multiple times by issuing poor projections for upcoming quarters. The company has also struggled to maintain earnings growth (C) and cash flow (C), and it’s seen better days in terms of analyst earnings revisions (C). So LULU, a moderately-rated stock, currently receives a C for its Fundamental Grade and an F for its Quantitative Grade (which measures buying pressure).
Bottom Line: As of this posting, I consider LULU a D-rated Sell. The ever-changing tide of consumer-trends has shifted again as consumers have been less willing to shell out $80 for a pair of yoga pants as they were a year ago.