Lululemon Athletica Inc. (LULU) Stock Shows the Ugly Side of Retail

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“I don’t do retail,” is something my father has always said when it comes to investing. It’s one of the wisest pieces of advice I’ve ever gotten with regards to investing. If you can catch a stock like Lululemon Athletica Inc. (NASDAQ:LULU) during good times, you’ll be happy. But as a risk-averse investor, LULU stock is exactly the kind of stock I would not touch in my forthcoming stock advisory newsletter, The Liberty Portfolio.

Lululemon Athletica Inc. (LULU) Stock Shows the Ugly Side of Retail

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Q4 earnings for Lululemon stock came out, and the way the market reacted shows exactly why I avoid stocks like this.

Q4 revenue increased 12% to $790 million from $704 million. That’s dandy. Even more dandy is that comparable sales increased 8%. Any retail operation that grows comps by more than 5% is impressive. But 8%? Very strong.

Gross margins increased dramatically to 54.2% compared to 50.3%. Gross margins are a great indicator that shows how efficient revenue generation is in regards to expenses. This is a gigantic year-over-year gain that is very impressive.

Margin expansion filtered to the operating line, also. Operating income was up 18% to $197 million, with margins of 24.9% compared to 23.6%. I ignore earnings-per-share because that is easily muddied using share buybacks. However, backing those out, we find net income rose to $136.1 million from $117.4 million, or 16%.

Where Did LULU Stock Go Wrong?

There is very little to dislike about any of this. So why was Lululemon stock down 23% as I was writing this article? Let’s see if there’s something funky about the FY results.

Revenue increased 14% to $2.3 billion from $2.1 billion. Comparable sales increased 6%. Gross profit increased 20% to $1.2 billion, and once again, gross margins jumped big time, to 51.2% compared to 48.4%.

Operating income increased 14% to $421 million, although we can see the operating margin improvement came mostly from this quarter, as FY was 18% compared to 17.9%. FY net income was $303.4 million, up from $266 million, or 14%.

What’s not to like? Guidance. This is the reason I hate retail stocks like LULU stock. A company can deliver a solid quarter, but then say that sales were going to be weaker in Q1 and then … BLAM! Specifically, Lululemon said the comps would be in the low-single digits for the quarter and for the year.

What I found bizarre, however, was that they are blaming this on manufacturing gear with bland colors, when consumers seem to want brighter colors for spring.

Bottom Line on Lululemon Stock

First of all, what athletic clothing maker doesn’t do what every other regular retailer figured out decades ago: Spring means color! Second, look what the market does to a dumb move like this! It didn’t just sell the stock, it beat it with a baseball bat.

So I don’t care how strong margins are or how net income is growing impressively for Lululemon stock. There is too much risk in retail and I have seen this story play out countless times over my investing career. The tiniest thing can crater a stock and that fall could suddenly turn out to be permanent.

That’s not to say that LULU stock is going to fall apart and the company is going to end in bankruptcy. Hardly. It has $739 million in cash and no long-term debt, and generated $385 million in operating cash flow. This is a very healthy business with a very healthy balance sheet. The problem is that owning Lululemon stock will give you heartburn.

Can you do anything with LULU stock? I think most retail stocks are trading vehicles. If you feel like taking on risk, you could buy here, set a 5% to 7% stop loss on Lululemon stock and see if you can catch a rebound.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/lululemon-athletica-inc-lulu-stock-ugly-side/.

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