Athletic-retail giant Lululemon (LULU) reported another strong quarter Thursday. For the first quarter of 2012, the firm saw revenues grow 53% compared to the first quarter of 2011, on a same-store-sales increase of 25%. Earnings per share increased at a pace slower than sales (up 39%), in part due to lower gross margins (55% versus 58.7% a year ago) and a slightly higher share count. On the basis of valuation, we don't yet consider Lululemon to be a Valuentum stock (click here to learn this newly-defined investment style).
While the results were nothing short of spectacular, in our view, guidance was slightly underwhelming. Management guided to fiscal-year 2012 earnings of $1.55-$1.60 on sales of $1.32 billion-$1.34 billion. The Street consensus for the year was pegged at $1.63 per share, while the consensus revenue estimate was $1.35 billion. The outlook is also significantly lower than our expectations of $1.70 per share in earnings on $1.46 billion in revenue for the year. However, we think the firm is following Apple's (AAPL) strategy of purposely giving conservative guidance to temper Wall Street's expectations and avoid setting the firm up for failure. Therefore, we'd take this guidance in stride.
On the conference call, management warned of "no upside for revenue until the fourth quarter" while the company focuses on product innovation and new releases. Though we applaud CEO Christine Day for not pumping the stock, we think the firm's guidance is unrealistically conservative. The firm faces a tougher comparison in the second quarter, but it has grown same-store-sales in excess of 20% in three of the last four quarters. We "only" forecast the company's same-store-sales to grow at about 12% for the rest of the fiscal year in order to derive our revenue and earnings estimates, which remain unchanged. With only about 180 stores worldwide, the firm will continue to open new stores at a very productive and profitable clip.
What we like most about Lululemon is its ability to generate cash flow, especially relative to a company like Under Armour (UA). Lululemon netted $15 million in operating cash flow for the first quarter, in what is historically its weakest quarter. The company now holds $424 million in cash on its balance sheet without a dollar of debt. We expect this figure to grow to well over $500 million for the year. It's also important to recall that last year the company literally missed out on sales because it didn't have enough inventory on hand. We suspect some of this pent-up demand will be satisfied through the course of fiscal year 2012.
We think Lululemon underscores the enormous underlying shift in consumption habits occurring in the United States. Consumers are opting for more fashionable and brand oriented items, which is putting pressure on low-end retailers but allowing affordable luxury like Lululemon to prosper. Also, Lululemon clothes are flattering…to say the least. In a society that gets married later and spends more time trying to attract the opposite sex than ever, even work-out clothes have to look good now. The long-term industry dynamics look incredibly compelling, in our view.
Though the valuation may scare away value investors, as shares trade at 37x our 2012 earnings forecast, we think Lululemon is reasonably priced on a discounted cash-flow basis. Further, the company's price-to-earnings-growth ratio of 1.1 is more compelling than its peers, Under Armour (2) and Nike (NKE) (1.6). Nevertheless, we'd have to see Lululemon's shares fall further before establishing a position in our Best Ideas Newsletter.