Despite Reversal of Fortune, Lululemon Athletica Inc. Stock Is Still Expensive

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LULU stock - Despite Reversal of Fortune, Lululemon Athletica Inc. Stock Is Still Expensive

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Just when clothing retailers seemed down for the count, Lululemon Athletica inc. (NASDAQ:LULU) comes in with robust comparable store sales and a beat on the top and bottom line. Such is life with clothing retailers, as consumers are fickle. One day business may stink, and the next day it could be great, or vice versa.

I have to admit that I’m surprised. Let’s chop these numbers up and see where things are good for LULU stock and where they aren’t. We’re going to back out the ivivva restructuring costs so we can just look at operating results, and also look at numbers on a constant dollar basis since currency had a modest impact.

LULU revenue came in at $619 million, up 12% compared to last year. That’s nice, and it came on the back of a solid metric: comparable revenues increased 7%, although that was only 1% on comparable store sales.

Gross profit came in at $322 million, a terrific increase of 16%. This means that with the nice increase in revenues, expenses were kept under control. That naturally would mean gross margin probably increased, which it did by 90 bps, to 52%.

LULU’s income from operations increased $14.8 million, or 16%, to $107.8 million. Again, a very strong performance. At the bottom line, LULU net income increased to just about $80 million, an increase from last year’s $68.3 million, or about 18%.

LULU purchased 100,000 shares for about $6 million in the quarter. That’s good. I hate repurchases, and I’m not convinced LULU stock is terribly cheap anyway.

As far as financial health, LULU earnings showed a cash and investment balance of $650 million, and the company carries no long-term debt. That, of course, is always a great thing. It means LULU has tremendous flexibility and can draw debt down if need be. Along with $130 million in operating cash flow, LULU is in fine financial health.

There were three driving factors for LULU earnings this quarter. First, LULU has been a bit behind the curve as far as online sales. So it has tried to push its online presence forward and did so successfully, with a 25% increase in online sales. That, of course, also means higher margins.

Secondly, LULU also decided to muscle into the men’s clothing arena. I wasn’t certain this would go over well since the perception of the company is that it is a woman’s retailer. Still, the quarter saw a 21% increase in new male customer transactions thanks to a male-centered marketing campaign launch.

And thirdly, China surprised by delivering a four-fold increase in sales.

Bottom Line on LULU Stock

I am not a fan of clothing retailers, so I’m going to be hard-pressed to suggest investors buy any clothing retailers. Consumers can turn on a dime as far as fashion, even in athletic wear, and competition is fierce.

Yet LULU stock is also just expensive and unjustifiably so. Analysts see 13% annualized growth going forward, and while I’m willing to grant LULU a 10% premium for its cash position, I would not pay more than 15-16x. Meanwhile, LULU stock trades at 30x this year’s earnings.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.


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