Lululemon Is Once Again Raising Eyebrows

| About: Lululemon Athletica (LULU)
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Summary

Lululemon Athletica has caught my attention this afternoon as it looks like the stock is going to take off following earnings.

I discuss performance and expectations for the name.

Why I assign a buy rating.

Lululemon Athletica (NASDAQ:LULU) has caught my attention this afternoon as it looks like the stock is going to take off following earnings that seemed to be very strong with even better guidance. It is once again raising some eyebrows. This positive momentum could be an opportunity in a stock that has been in growth mode for years. But the question is, can the athletic wear company continue its growth trajectory? Some are betting that it cannot, hence short interest and occasional strong selloffs. Further, the name has been priced for perfection like many other growth names. But can you buy a stock that is priced this way? Well, what we need to do is dig into the numbers as well as assess expectations in order to understand where this stock is heading and the momentum is leaning.

Why do I say the name is priced for perfection? Simply look at the basic trading metrics. It is trading at 30 times earnings. It does not pay a dividend. Competitors in the athletic wear space that I have previously covered trade at 15-20 times current earnings. This is a strong growth name that's pure and simple. Some may argue we missed the boat on the strong returns. However, the stock had pulled back a lot from the highs, so the momentum may be shifting positive once again. With all that said, what is going on?

Let me first start off by saying the net sales were up 13.5% year over year to $544.4 million from $479.7 million a year ago. I like to look at year-over-year comparisons because quarter versus quarter in this sector doesn't make much sense. The name is very seasonal. Year-over-year comparisons are appropriate for my style of long-term investing, but are particularly useful for stocks like Lulu which command a premium. I am looking at this as a long-term investor. Sales growth of 13.5% is strong, but slightly below what I would look for in a name trading at 30 times current earnings.

All in all, revenues beat estimates by about $4.2 million. While this may not seem that strong, a beat is a beat, and when priced for perfection, anything but meeting and exceeding expectations can be disastrous. With this beat, the stock will not selloff. But it also depends on more than just the headline revenue figure. We also should continue to consider comparable sales - and these increased 4%. These are strong, and this is a metric we must watch going forward. I want to add that direct-to-consumer sales are trending higher in many sectors. For Lulu, these sales spiked an adjusted 16% to $104 million.

Turning to expenses, these also rose year over year. Cost of goods sold increased $11 million to $266 million. Further, selling, general and administrative expenses were up $30 million to $185 million. As such, because the increase in sales outpaced the increase in expenses, gross profit jumped 25% to $278 million. Turning to earnings, the diluted earnings per share were $0.47, up from $0.35 last year. Further, this surpassed consensus estimates by a strong $0.04.

So, for a company priced for strong growth, it delivered. But wait, there is more. The outlook too, was strong, at least considering the expected growth trajectory. For fiscal Q4 2016, net revenue will be in the range of $765 million to $785 million based on total comparable sales in the mid-single digits on a constant dollar basis. Diluted earnings per share are expected to be in the range of $0.96 to $1.01 for the quarter. Guidance for the full-fiscal 2016 is strong too. Net revenue will be in the range of $2.32 billion to $2.34 billion based on total comparable sales in the mid-single digits on a constant dollar basis. Diluted earnings per share are expected to be in the range of $2.18 to $2.23 for the full year. If the company can come in at the higher ends of these ranges, I foresee the stock continuing to appreciate. Finally, the board approved a strong share repurchase program, which will boost earnings. Shares look to head well above $60 on this news. I assign a buy rating.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles that are time sensitive. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.