Lululemon Athletica Inc.’s (NASDAQ:LULU) 15% decline last week has made headlines. The company reported a decent second quarter after the close on September 1, but lower-than-expected guidance for the full year sent the shares tanking.
I was asked on Twitter if the weakness was a buying opportunity, so let me explain why I’m not touching the stock just yet.
Founded in 1998 in Vancouver, Canada, Lululemon designs and sells yoga-inspired athletic apparel for yoga, running, training and “most other sweaty pursuits” for both men and women. The company began as a design studio by day, yoga studio by night, opening its first store in November of 2000 and since growing to 379 stores spread throughout the United States, Canada, Australia, New Zealand the United Kingdom.
In its recent second-quarter report, the company matched Wall Street estimates with 11.8% earnings growth to 38 cents a share. Revenue was up 13.6% to $514.5 million, driven by improved sales comps and an increase in square footage thanks to the opening of 43 new company-owned stores. However, the results fell short of expectations by about $1 million.
Comparable-store sales gained 3% in the quarter (4% on a constant currency basis), but the top line was affected by currency headwinds that held back results by $5.3 million, or 1%.
LULU Stock Looking Forward
For the current quarter, management expects revenue of $535 million – $545 million and earnings of 42 cents – 44 cents a share. And for the full year, guidance projects revenue of $2.32 billion – $2.35 billion on earnings of $2.07-$2.15 a share. This is what likely led to LULU’s pullback, as Wall Street was looking for revenue of $2.34 billion and EPS of $2.15.
In addition, management noted that the company faced traffic headwinds in the second quarter and expects that weakness to continue through year-end. As a result, LULU has projected mid-single-digit sales comps, raising concerns about its ability to continue seeing solid growth.
LULU has been downgraded due to the weakness, with Jeffries moving the stock from a “buy” to a “hold” and lowering its target to $76 from $80 and Morgan Stanley revising its stance from “overweight” to “equal weight.” The firm also reduced its price target to $70 from $74.
But my major concern here is increased competition. While LULU’s sales growth has outperformed the majority of the apparel industry, Under Armour Inc (NYSE:UA) still far outshines its peers with growth around 30% in each of the last four quarter. Plus, LULU is trading at a premium. The stock sold for an average 42X current earnings during the month of August, compared to Nike Inc (NYSE:NKE) at 26.4X, VF Corp (NYSE:VFC) at 21.5X and Gap Inc (NYSE:GPS) at 12X.
I’m keeping an eye on the stock, and while it could present a good opportunity in time, I don’t see any urgency to buy right now.
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