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Lululemon athletica inc. (NASDAQ:LULU) reported another wonderful quarter of sales and earnings growth during its Q2 2012 conference call on Friday, September 7th. After initially opening down 2%, the stock rallied and finished the day with a gain of more than 12%. Revenue increased 33% YOY to $282.6 million, driven by a combination of 15% comparable store sales growth, a 91% increase in direct-to-consumer sales and the addition of 38 new locations that opened over the last 12 months (bringing the total to 189 stores worldwide). Management reported EPS of $0.39, which included a one-time tax benefit of $0.05 per share. (When an adjustment is made for the one-time tax benefit EPS grew 31% YOY to $0.34 per share.)

Taxes were the most interesting topic addressed in the conference call. During the quarter, the Company was able to revise the structure of its internal intercompany transfer pricing agreement for inventory. The new structure shifted income away from Uncle Sam and reduced the Company's expected tax rate for fiscal year 2012 to 29.5% from 36.5%. Chief Financial Officer John Currie stated during the conference call "[that] tax expense decreased $7.8 million to $13.7 million or [to] a tax rate of 19.1% in the second quarter of 2012 from $21.5 million or a tax rate of 37.5% in the second quarter of fiscal 2011."

During the conference call, management revised their estimate for full fiscal year 2012 to account for the reduction in taxes. They increased their earnings target to $1.76 - $1.81 per share from $1.55 - $1.60 last quarter. The majority of this increase, $0.19, is attributed to the Company's reduction in effective tax rate, while the other $0.02 comes from a higher full year 2012 sales projection (now estimated between $1.345 - $1.36 billion).

Lululemon's Q2 performance remains on par with the estimates laid out in my July 18th article Lululemon Is A Strong Buy At Current Levels. Although I still hold these estimates, ($1.4 billion in revenue, 37 new stores and direct-to-consumer sales representing 13% of the total) the significant reduction in the effective tax rate has a huge effect on my fiscal year 2012 EPS estimate and 6 month stock target.

I now believe that lululemon will report 2012 earnings of $2.00 per share and that this will push the stock into the range of $80-$90 per share over the next 6 months (assuming a P/E ratio between 40-45).

Source: Lululemon's Stock Has More Room To Run