Lululemon Athletica inc. (LULU) Stock Defies Earnings. Get Ready to Sell.

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LULU stock - Lululemon Athletica inc. (LULU) Stock Defies Earnings. Get Ready to Sell.

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Lululemon Athletica inc. (NASDAQ:LULU) managed to weather its sales slump and deliver a solid earnings beat, sending LULU stock skyrocketing 18%. Not too shabby.

Lululemon Athletica inc. (LULU) Stock Defies Earnings. Get Ready to Sell.

The Vancouver-based company delivered $68.29 million of net income, 50 cents per share, on revenues of $544.42 million, a big jump from 38 cents per share a year ago. Analysts expected LULU stock to earn 43 cents.

As if that were not enough, the company announced a new $100 million share buyback plan. LULU stock, which had been up 4.6% during Dec. 7 trading in anticipation of good news, jumped another $9.61 per share in overnight trade, or 15%. You could have bought LULU stock for $56 on the morning of Dec. 5, and now, three days later, it’ll set you back $70.

The best news of all, however, was to be found deep in the numbers. That’s the gross margin figure: 51.1%. This let Lululemon bring 12.5% of all revenue to the net income line, a feat rivaled only by Nike Inc (NYSE:NKE).

How Lululemon Does It

CEO Laurent Potdevin has done a good job executing the original vision of founder Chip Wilson, which is to deliver high-end athletic apparel with exclusive manufacturing contracts, sold in company-owned stores. By matching inventory to demand, Lululemon maintains full pricing power.

It is a unique model, but it leaves the company vulnerable to competition if tastes should change or the company’s image should take a hit.

That’s just what happened in 2013. A scandal involving see-through yoga pants that tore was badly mishandled by Wilson, who was eventually forced out, along with CEO Christine Day.

They were replaced by Potdevin, a far more modest man who came from Tom’s Shoes, another fast-growing and quirky company. Once he recovered the company’s morale, he expanded into other areas of athletic apparel, making Lululemon more of a lifestyle brand than a mere apparel company.

The LULU Stock Recovery Looks Complete

The Wilson days are now well in the company’s past. At the bottom of the scandal in mid-2014, Lululemon shares traded hands below $40. They recovered to touch $80 in August, but had slid noticeably since then, as analysts questioned the athleisure trend of people wearing athletic clothes on the street and to work. (Potdevin hates the word “athleisure.” So do I.)

Competition continues to grow. Under Armour Inc (NYSE:UA) and Nike have come out with their own lines of yoga clothes and equipment. There are also new entrants to the growing market, like Fabletics, co-founded by actress Kate Hudson.

The increased competition led many analysts to assume Lululemon would have difficulty. I will admit to being among those who underestimated him.

October’s result is making them take a second look at Potdevin’s Lululemon and the fact that the good news came in the fall quarter means there is still the huge Christmas season to come.

Bottom Line on LULU Stock

Potdevin now has margins back to where they were in the glory days under Chip Wilson, and has expanded the line into things like running tights and cold weather parkas. The company also helps sponsor festivals and retreats that transform it into a healthy lifestyle brand, not just a yoga clothes peddler.

LULU stock could easily touch $80 in January. If it does, you might want to take your profits for the time being.

This is a relatively small company, whose annual revenues are still just a fraction of a single quarter at Nike, and thus it is subject to wild swings in analyst attitudes, that could easily batter the stock again.

Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.

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Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


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