Lululemon's Growth Hasn't Stalled

Dec.13.12 | About: Lululemon Athletica (LULU)

Yoga pants and athletic apparel maker Lululemon (NASDAQ:LULU) reported fantastic third quarter results. Revenue jumped 37% year-over-year to $316.5 million, slightly better than consensus expectations. Earnings jumped 44% year-over-year to $0.39 per share, which was also slightly better than anticipated.

Yet again, the company proved to be immune from broader macroeconomic pressures, with same-store sales jumping 18% compared to the same period last year. Gross margins fell but held up fairly well, dropping only 40 basis points year-over-year to 55.4%. Fourth quarter guidance implies that margins will be lower in the next quarter as well, but with sales growing at such a rapid clip, we think some slight compression is to be expected. Still, we don't expect pricing to suffer from excess inventories, as inventory grew 27% year-over-year ($164.7 million at the end of the third quarter).

The company's direct-to-consumer business continues to do well, surging 89% year-over-year to $45.1 million. We expect online sales to cannibalize some in-store sales as it becomes a more common part of Lululemon's business (and consumers become more familiar with the brand's sizing and fit). The company agrees, in our view, as it released fourth quarter same-stores sales growth guidance in the high-single digit range - well below the company's historic trends. However, it's important to recall that the company traditionally issues conservative guidance, so we believe same-store sales are more likely to grow in the low-double digits, even with online sales expansion.

The firm raised its full-year earnings guidance to $1.81-$1.83 per share, roughly in-line with consensus, though its fourth quarter earnings guidance of $0.71-$0.73 per share came in below the consensus estimate. However, we're expecting earnings to come in a penny or two ahead of consensus.

Overall, we continue think Lululemon will become one of the premier athletic apparel brands in the world. It's also been speculated that Nike (NYSE:NKE), which recently divested Cole Haan and Umbro, would have interest in acquiring the brand, but we believe the price would be prohibitively high (and that Nike competes fairly well against Lululemon, albeit for a lower-end customer).

After acquiring a premier location on Boston's Newberry Street, Lululemon seems content with using its cash to expand its real estate profile, and we do not see a dividend on the horizon. We believe some of the cash will be used to expand its global exposure, which remains limited to just North America and Australia.

Though its price/earnings ratio is intimidating (over 40 times 2012 earnings at current levels), the firm's operating cash continues to exceed earnings growth. Still, we think shares are fairly valued, but we tend to like the firm more than high-growth peer Under Armour (NYSE:UA).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.