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Introduction

Lululemon Athletica (NASDAQ:LULU) is one of the most misunderstood growth stocks going into 2013. Varying opinions go from one extreme to the other. Now the range is broad, and analysts on Seeking Alpha anticipate $85 per share, while the worst case scenario is $44 per share.

I believe that the stock will exhibit phenomenal growth, and will be sustained over a long time frame. LULU's unique retail philosophy, paired with excellent management and the favorable economic conditions are likely to surprise analyst expectations. As a result, the company is likely to appreciate by upwards of 30% by January 2014.

Qualitative Analysis

Source: Information pertaining to Lululemon Athletica came from the shareholder annual report.

Their expansion effort continues to succeed as it continues to open stores at an alarming rate. Between 2011 and 2012 (fiscal year ends January 30th) the company was able to grow stores from 133 to 174. This is a 33% increase in the number of stores, with more stores being opened internationally in affluent markets (Hong Kong, Queensland Australia, etc.). Their focus on athletic, yoga inspired clothing also includes high profit margins. The products it offers can range from $50-$120, sometimes even more. The average sales per square foot is $2,004 during fiscal year 2011, implying high efficiency of floor space.

The company has the characteristics of a growth company. The three strongest factors for growth are the high revenues per square foot, the opportunities in underserved high net worth markets (Hong Kong, Shanghai, Seoul, Tokyo, London, Paris, Frankfurt, etc.), and high margins (gross margin of 55.5%, operating margin of 27.06%, and net profit margin of 18.78%).

The business competes with Nike (NYSE:NKE), Under Armour (NYSE:UA), The Gap (NYSE:GPS), Bebe Stores (NASDAQ:BEBE), among many others.

Technical Analysis

On 12-17-12 LULU broke above the symmetrical triangle formation. Today the stock was able to stay above the trend line, and is likely to trend higher going in 2013.

(click to enlarge)

Source: Chart from freestockcharts.com

The stock is trading above the 20-, 50- and 200-Day Moving Average. The stock is trending higher but experienced some volatility due to the fiscal cliff.

Notable support is $52.00, $62.00, and $72.00 per share.

Notable resistance is $80.00, $85.00 and $100.00 per share.

Street Assessment

Analysts on a consensus basis have atmospheric expectations for the company going forward.

Growth Est

LULU

Industry

Sector

S&P 500

Current Qtr.

45.10%

52.20%

160.40%

9.30%

Next Qtr.

37.50%

52.40%

119.40%

15.00%

This Year

46.00%

11.60%

12.20%

6.90%

Next Year

23.40%

18.50%

2.80%

13.10%

Past 5 Years (per annum)

52.34%

N/A

N/A

N/A

Next 5 Years (per annum)

29.71%

13.82%

13.54%

8.71%

Price/Earnings (avg. for comparison categories)

39.88

13.76

15.69

10.11

PEG Ratio (avg. for comparison categories)

1.34

1.28

1.73

1.17

Source: Table and data from Yahoo Finance

The company shows phenomenal growth as analysts on a consensus basis have a 5-year average growth rate forecast of 29.71% (based on the above table).

Earnings History

12-Jan

12-Apr

12-Jul

12-Oct

EPS Est

0.49

0.3

0.31

0.37

EPS Actual

0.51

0.32

0.39

0.39

Difference

0.02

0.02

0.08

0.02

Surprise %

4.10%

6.70%

25.80%

5.40%

Source: Table and data from Yahoo Finance

The average surprise percentage is 10.5% above analyst forecast earnings over the past four quarters (based on the above table).

Forecast and History

Year

Basic EPS

P/E Multiple

2008

$ 0.24

70.58

2009

$ 0.32

10.63

2010

$ 0.42

33.62

2011

$ 0.87

39.47

2012

$ 1.27

49.71

Source: Table created by Alex Cho, data from shareholder annual report, and price history is from Yahoo Finance.

The EPS figure shows that throughout the 2007-2012 period, the company was able to grow earnings. The company was able to grow through the great recession which implies that the business has competitive strengths.

(click to enlarge)

Source: Table created by Alex Cho, data from shareholder annual report

By observing the chart we can conclude that the business has a unique business model that is likely to out-perform going forward.

(click to enlarge)

Source: Forecast and table by Alex Cho

By 2017 I anticipate the company to generate $7.60 in earnings per share. This is because of earnings growth, improving global outlook, and earnings management.

The negatives: If the company were to ever miss one of the forecast estimates, the stock will crash. There's a reason why investors are paying a huge premium over growth, if the growth dissipates for whatever reason, the stock will plummet.

The forecast is proprietary, and below is a non-linear chart indicating the price of the stock over the next 5-years.

(click to enlarge)

Source: Forecast and chart by Alex Cho

Below is a price chart incorporating the past 10 years and the next 6 years. Detailing 16 years in pricing based on my forecast and price history on January 30th of each year.

(click to enlarge)

Source: Forecast and chart created by Alex Cho, data from shareholder annual report, and price history is from Yahoo Finance.

Investment Strategy

LULU currently trades at $74.65. I have a price forecast of $75.35 for January 30th 2013. The stock is fairly valued currently; I anticipate the stock to do extremely well going into 2014. The fiscal year for 2013 ends in January 2014.

Short Term

Over the next twelve months, the stock is likely to appreciate from $74.65 to $100.06 per share. This implies 34% upside from current levels. The technical analysis indicates an uptrend, while the previously mentioned price forecast using fundamental analysis further supports the trade set-up.

Investors should buy LULU at $74.65 and sell at $100.06 to pocket short-term gains of 34% in 2013.

Long Term

The company is a great investment for the long-term. I anticipate LULU to deliver upon the price and earnings forecast despite the risk factors (missing analyst expectations). LULU's primary upside catalyst is product development, international expansion, demand, and earnings management. I anticipate the company to deliver upon my forecasted price target of $311.22 by 2018. This implies a return of 313% by 2018. This rate of return is exceptional, but the risk is high (5-year beta of 2.3).

Considering LULU has a market capitalization of $8.3B, the lack of liquidity would make this an investment opportunity more appropriate for small growth oriented investors.

Conclusion

Investors are currently paying a 46.3 multiple over current earnings for a very good reason. I remain optimistic on the company going forward.

The conclusion remains simple: buy Lululemon Athletica.

Source: Lululemon Athletica Remains Hot For 2013