Lululemon Athletica's (LULU) stock is all set to squeeze as short positions in its overall float has reached 34%, a level way high for a fundamentally sound company. At its operational front, the company has apparently moved on from its too-sheer pants debacle. The company will be able to replenish its recalled stock of pants within 30 to 45 days, much sooner than the stipulated timeline. The stock is recovering fast from its year low of $62 and gained about 19 percent since then.
The company had to pull-off 17% of its pants stocks from stores after complaints that the fabric was too transparent. The company is afraid of a revenue hit of $12 million to $17 million due to this incident. The company, subsequently, revised its first quarter earnings per share estimate down by 11% to 12%. It, however, handled the situation very well. The company is now in position to get its stock back up within a shorter time frame than the expected time.
Since the incident broke, most investors have been dumping this stock and the short position proportion in its total float has been increasing. However, with the management coming out with strong signals of recovering from this manufacturing glitch, confidence of the street in the stock is back. Now, the stock is heading toward a short squeeze as squaring off short positions are driving the stock's price up, which in turn is forcing other short positions to get closed.
Investors' confidence is further boosted by the strong earnings the company has come up with for the latest quarter.
Stupendous top and bottom-line growth
Revenues of Lululemon Athletica are increasing at a rate of 40% and earnings per share of the company are growing at an average rate of 60% annually, over a period of 4 years. This shows that not only the company's top line is growing but also it is improving its margins, over the years. Fourth quarter results of fiscal year 2012 were on the same line for the company. Total sales rose 30.7% to $485.5 million, from $371.5 million a year ago. Net income for 4Q12 was $109.4 million, up ~50% from $73.5 million, same quarter previous year. It was able to beat the street expectation by one cent per share earnings.
The company has given promising earnings guidance. For the first quarter of fiscal 2013, the company expects net revenue to be in the range of $333 million to $343 million. Diluted earnings per share are expected to be in the range of $0.28 to $0.30. For the fiscal year 2013, the company expects net revenue to be in the range of $1.61 billion to $1.64 billion and diluted earnings per share to be in the range of $1.95 to $1.99. These projections are way lower than the actual performance the company is showing over the years (probably an effect of the sheer-pant incidence). Therefore, I believe the company might outperform the street expectation in both its quarterly and annual results announcement.
Fundamentals of the company and its competitors
Lululemon Athletica does not completely come under the sports apparel industry as it has made its own niche in between sports apparel and the fashion industry. However, most product and the techniques used by the company are similar to other sports apparel companies. That's why the biggest competitors of Lululemon are players like Nike (NKE) and Under Armour (UA).
Fundamentally, Lululemon has a P/E ratio of 40.59 and incorporating the growth factor, its PEG stands at 1.47. P/S ratio of the company is 7.92, which is way higher than the next best in the industry (P/E of Under Armour is 3).
Nike captures the biggest share of the market. Nike's associates like Converse Inc, Hurley International, LLC, Jordan Brand and Nike Golf contribute significantly to the company's total revenue. In the year 2012, Nike's sales grew by 9% and net earnings grew by 4%. Nike has a P/E at around 24 and PEG around 2. P/S of the company is 2.5 which compared to Lululemon is very low.
Under Armour is similar to Lululemon in many ways. Under Armour is in its growth phase and the stock has gained around 900% in the last 4 years. The company claims to be the originator of performance apparel, designed to keep athletes cool, dry and light. Net revenue of the company is growing at a rate of about 25% and earnings per share are growing by 31% the last 4 years. Fundamentally, it has a P/E value of 46, PEG 1.81 and P/S of around 3, which makes Under Armour an industry leader.
With the short squeeze adding to the immense upside potential to the stock, I believe it is the best time for investors to put their money in. Moreover, the company is growing and is fundamentally strong, which is evident from its earnings and ratios. This makes the stock a good "buy" in the long term. I believe Lululemon is one of the few stocks that is suitable for both long term and short term investors.