Lululemon Reduces Guidance; Could Present Buying Opportunity

Shares of Lululemon Athletica Inc. (LULU) took a big hit after the yoga apparel retailer reported first quarter results. While earnings per share of $0.12 were in line with consensus and sales were up a healthy 74.5%, the company trimmed its full-year guidance to a range of $0.68 - $0.71 from $0.70 - $0.72 as a result of costs associated with new hires, staff training programs and a bigger push for its showroom strategy.

While the lower guidance will likely push shares of Lululemon lower, RBC Capital Markets analyst Howard Tubin says a buying opportunity may emerge.

He told clients:

The fact that incoming CEO, Christine Day, has implemented some initiatives of her own design is not that surprising to us, but we expect selling pressure nonetheless.

The analyst likes the company’s fundamentals, noting that gross margins continue to rise despite the difficult U.S. environment, along with strong same-store sales growth and the healthy performance of new stores.

Mr. Tubin also noted Lululemon’s large short interest of more than 13 million shares, which represents a 130% increase since the end of 2007. He acknowledged that with a share price closer to $60 where it was trading in October, there was indeed less risk in a short trade on Lululemon. Now, however, with the strong North American retail performance , favorable market fundamentals, and several years of better-than-average growth expected – more than 40% in the near-term and 25% long-term – Mr. Tubin said the short position is much more risky.

He continues to rate Lululemon at “outperform” with a $47 price target.

Comments

[David Tsao]

I wish LULU good luck in proving/proving these lofty valuations going into 2008/2009. Christine Day's experience at Starbucks may not translate over well into women's apparel. I wasn't impressed much with the earnings call as Bob Meers and Christine Day both fielded questions back and forth. If you're going to pass the reigns over, hand it over to the new CEO.

One of the analysts asked an interesting question regarding why the management/personnel changes now, and what LULU was missing prior. Part of the argument put forth by Christine Day, was the hire of Sheree Waterson who has prior e-commerce experience. She does, with enfashion.com during the dotcom days, but those online properties are now defunct. Starting up an online sales channel based on the company's growth strategy and free cash flow position will not be easy and eat into margins. Depreciation of IT systems was estimated at $1.2mm. Pay attention to CapEx and SGA in the coming quarters. Maybe they will outsource this operation... to "try" and keep growth costs down.

time will tell.

[matb415]

13 million shares sold short out of a public float of 18 looks good but when will the lockups expire on the other 50 million shares?