Lululemon's Growth Justifies High Multiples

| About: Lululemon Athletica (LULU)

Not surprisingly, Lululemon’s (NASDAQ:LULU) previously weak fourth-quarter guidance was revised upwards Monday, sending shares higher. The company hinted that same store sales would come in the low- to mid- 20%’s (20%+) and that revenue would be be in the range of $358 to $363 million (from $327 to $332 million). Both are staggering increases, and the company also guided earnings to a range of $0.47-$0.49 per share (from $0.40-$0.42).

Since the increased ranges aren’t much different from what we had expected, our fair value remains unchanged at $68 per share (in the spirit of transparancy, we make our DCF valuation model template available here). We think the increased revenue range reflects the increased likelihood that inventory grew sufficiently to meet burgeoning demand, whereas it had been chasing it all year. Additionally, seasonally warm weather in the Midwest and Northeast may have helped boost sales of Lululemon apparel, which is mostly accessible through brick-and-mortar stores. Foot traffic in major metropolitan areas, which are generally drowning in snow this time of year, has been strong. This could also benefit sales of running shoes and apparel, as the outdoor running season has been extended by a few months.

Though we’ve traditionally been bearish on highfliers like Netflix (NASDAQ:NFLX) and LinkedIn (NYSE:LNKD), we think that the growth at Lululemon justifies a high multiple. View our previous calls on Netflix and LinkedIn here and here. Even with the departure of Lululemon’s founder, who was serving as Chief Creative Officer, we think the company will continue to create products that consumers love. It seems like the men’s apparel is gaining traction, and we think it could soon compete with Under Armour (NYSE:UA) and Nike (NYSE:NKE) for athletes' closest space.

With room for growth both in North America and abroad, we think Lululemon remains a growth company that could yield high returns for those with high risk tolerance. However, with shares trading up from $42 to $60 in less than a month, we’d wait for a larger margin of safety before getting too excited about the name. Additionally, with so many shares being sold short, the stock is prone to large price swings that can generate great buying opportunities, but also provide a volatile ride for investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.