Shares in Lululemon Athletica inc. (NASDAQ:LULU) got off to a great start in 2015 after a couple of years of disappointing returns, but the latest quarterly earnings report could put an end to the run as LULU issued a weak profit forecast.
LULU has been struggling to keep up with the lofty standards it set for same-store sales growth, as well as margin compression and supply-chain challenges. And that’s all after it spent last year putting behind it an embarrassing recall of see-through pants and a related series of PR blunders.
True, not all of Lululemon’s problems are of its own making. Most retailers have been hit by some combination of brutal winter weather and the West Coast port slowdown. But there’s more to LULU’s woes than those outside problems.
After all, a strong end to last year put LULU back on track. Shares ended 2014 with a 30% rally and are beating the market by a wide margin so far this year too. But they might not be for much longer.
LULU stock has been in decline since late last week amid jitters that it would issue a soft earnings forecast. Indeed, Lululemon stock shed more than 7% in the three trading sessions before its quarterly report.
As it turns out, the market was right to worry.
Lululemon issued first-quarter guidance of 31 cents to 33 cents a share — far short of Wall Street’s forecast of 39 cents a share, according to Thomson Reuters. The top-line view is also disappointing. LULU expects revenue of $413 million to $418 million, which is well short of the $442 million forecast by analysts.
LULU Lowballs Outlook
If that weren’t damaging enough, LULU blew up the Street’s full-year outlook too. Lululemon earnings per share are pegged at $1.85 to $1.90 for fiscal 2015, but the Street was predicting EPS at $2.06. LULU’s full-year revenue guidance of $1.97 billion to $2.02 billion was also light compared to the $2.05 billion forecast by the Street.
As uninspiring as the outlook may be, LULU did deliver a solid, Street-beating final quarter of 2014. Earnings came to 78 cents a share to exceed analysts’ average estimate by a nickel. Revenue came to $602.5 million to edge ahead of the $602.4 million forecast.
As optimistic as much of the analyst community is on LULU, the fact remains that customer response to its fashion is highly fickle and the high levels of traffic needed to sustain its formerly huge same-store sales growth are getting harder to achieve.
LULU had a great run over the last few months, but it’s not clear how much higher it can go in the short term. Shares look pricey at 30 times forward earnings, especially with margins forecast to retreat further this year.
It’s not even possible to buy a dip on earnings. In a sell-the-rumor-buy-the-news scenario, Lululemon stock rallied on the report after steadily tanking ahead of the release.
Despite the weak outlook, there’s a good argument to be made that Lululemon is back. The stock, however, looks like it already reflects that.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
