Lululemon: Take Profits While You Can

| About: Lululemon Athletica (LULU)
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In the recent market volatility, a high-beta correction took place. High profile names including First Solar (NASDAQ:FSLR), Netflix (NASDAQ:NFLX), Groupon (NASDAQ:GRPN) and Linkedin (LNKD) have seen a correction of 50% or more compared to their highs. Even firms in more traditional industries have seen substantial corrections (such as Abercrombie & Fitch (NYSE:ANF) which fell 40%).

At these levels high-beta darling Lululemon Athletica (NASDAQ:LULU) could easily be next.

Great Run

Lululemon's shareholders have enjoyed a great run. Trading as low as $3 in the beginning of 2009 the stock started a steady rally, quadrupling to $15 at the end of the year. In 2010 the stock doubled again, ending at $30 and as recent as this summer it reached a new high at $60. Ever since it reached this level the stock moves have become more violent while the share price remained elevated at $50 until today.

This morning Lululemon announced its third quarter results. While headline figures were good, it could not impress investors. Include some cautionary signs and you have a stock opening 15% lower at $42. Intra-day we saw quite a rally with Lululemon only down 6% trading around $47.

Quarterly Results

Headline figures look great with EPS growth of 50% to $0.27 for the quarter and management guiding $0.40-0.42 EPS for the coming quarter. However with annual EPS of just over $1, Lululemon trades at a price-earnings ratio of over 40, quite a high multiple for a traditional retailer.

Revenue was up 31% to $230mn, gross profits came in at 56% and net income at $39mn.

While the headline figures look great, there are warning signs on the horizon:

1. Comparable sales growth came in at 16% and management is guiding 10-15% for the coming quarter. Earlier this year comparable sales grew at 20%.

2. The enormous gross margin of 56% and net margin of 17% does for some reason not scare away customers, who happily pay for the overpriced products, but it does attract competition.

3. Inventories ballooned to $129mn, up from $57mn earlier this year. On its website Lululemon even created a category offering products it made too many of.

For those who enjoyed the ride, take the profits while you can.

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