This month, Lululemon (LULU) reported earnings and also provided guidance of where the company plans to be next quarter as well as the coming years. Initially, the stock fell in pre-market after management stated that the growth rate will cool down for the next quarter. Management stated that sales would growth in the single digits compared to the 26% rate that they saw the year before. However, the stock began to turn during the day and close up more than 5%.
It is very likely that management is being conservative given the fact that it is a premium retailer and this environment has not exactly been the best for retailers. I still fully expect Lululemon to beat its expectations. The company has done a fantastic job in terms of execution and I continue to see solid growth going forward.
Net income for the third quarter was $57.3 million or $0.39 per diluted share. This compares with net income of $38.8 million or $0.27 per diluted share for the second quarter of 2011. Overall same store sales have been up 18% and there are already plans to open new stores in multiple markets for the fourth quarter.
So Lululemon is on a great path right now. However, investors still seem to have some reservations about the company and more importantly its stock. The company is a specialty retailer and is known charge premium prices for its products. If a negative global macro event were to occur, Lululemon's sales would decline significantly.
The other major issue is the stock's valuation. The company is trading at a forward P/E of 32 and so investors could be concerned about growth being priced in already. Even though valuation is high, I believe Lululemon can see a stock price closer to $95 in the foreseeable future. In order to understand this valuation, we need to see where the company is at and where it is going.
Expectations for FY 2012 are $1.81-$1.83 per share. At $85 per share, this would imply a P/E of 46. However, I believe the estimate that management gave for FY 2012 is being understated. There are product additions that should help lulu beat those expectations. Lulu was unable to sell outwear last year due to issues related to the timing of production. However, the company has released it's "what the fluff" line of outerwear, which will be great for markets such as Canada. The outerwear line has higher selling prices and margins meaning it will bode well for earnings.
There are many other growth drivers for the company going forward. If we look at the markets where Lululemon is, the company is continuing to expand by adding more stores. For the third quarter, the company opened 8 new stores in U.S., 3 in Australia, and 1 ivivva store in Canada. They plan to open 8 Lululemon stores in the U.S., 1 in Canada and 1 in Australia during the fourth quarter. Store count should continue to increase as this is a relatively new market and demand continues to exceed supply.
Even if we ignore new stores, same store sales growth has been amazing. Stores in the U.S. alone saw a 30% in SSS. Even if the growth rate were to slow, it would still be fairly high. So lulu's current stores are seeing very good growth as well.
The big opportunity seems to be in the international markets. Management mentioned that they are planning to expand into 15 countries over the next two years. Lulu has a small presence in Singapore and Hong Kong. In addition to this, they are in London, where they are currently using a showroom model to gauge opportunities in Europe. Other revenue, which includes wholesale, showrooms and outlets, totaled $19.4 million or 6.1% of revenue for the third quarter versus 16.3% or 7% of revenue in the third quarter of last year. So these smaller showrooms and outlets are still making a sizable contribution to the company's revenue. The company has also eyed Germany as the next step for international expansion.
The company has plenty of growth drivers and while management lowered growth projections, I largely believe this is due to them just being conservative. From seeing strong SSS growth to international expansion, Lululemon can easily see its stock see $85. Current store count is over 180 and the company plans to generate an EPS of $1.80 this year. I believe store count can easily hit 300 by the end of 2014. The company has been adding about 8 - 10 stores in its established footprints per quarter. I believe the growth in Canada will slow, but they have only scratched the surface in the U.S. In addition to this, Europe and Asia should see strong store openings going forward.
However new stores alone will not add to the EPS, keep in mind the strong growth coming from established stores. It's a great combination of growth for the company. Based on this the company can see earnings from $6 - $7 per share. At an $85 price target, this puts the company's valuation around 14. That's very reasonable for a growth company and I don't expect valuation to contract as early as 2014. I believe the company will still be growing a few years from now, but the rate will be much lower than it is now. While Lululemon's stock might have a hefty valuation, it is well deserved and still doesn't encompass most of the company's future growth.