It often happens that a good movie can be ruined by becoming overhyped.
“Dude – you have got to go see Love Guru! Seriously the funniest movie I have ever seen. It is Mike Myers’ best performance ever. Period. Forget Wayne’s World. Forget Austin Powers. Go see it right now. Go!”
Many of us can relate to the feelings of disappointment, sadness and anger experienced after such a letdown - not only at Mike Myers, but at your friend. You walk out of the theater wondering, “What was my friend thinking? He thought that was funny … Can I be friends with someone that thought that was funny?!?”
In the case of movies, stocks and New Year’s Eve, it is always better to set everyone’s expectations as low as possible. That way, when you only chuckle once or twice during a movie, a company’s EPS only beats by 1 or 2 cents, or you realize that the overpriced exclusive party has hand-dipped corndogs, you can be pleasantly surprised.
Setting low expectations was exactly what Lululemon Athletica inc. (NASDAQ:LULU)’s management was trying to do on Monday, January 14. After the market closed, they released a statement that updated their guidance for the fourth quarter of fiscal 2012. The press release stated that the company now expects revenue in the high range of $475 million to $480 million and that diluted earnings per share will be $0.74 for the quarter. This sent the stock down 8% in early trading Tuesday morning.
Lululemon Athletica inc. (NASDAQ:LULU) has mastered the art of expectations management. Management has consistently lowballed analysts while simultaneously increasing estimates throughout the year. In 2010, Lulu’s original estimate was for earnings of $1.05 per share, which was later trounced as they finished the year with earnings of $1.69. Executives pulled a similar trick in 2011, setting their initial expectations low at $1.00, but finishing the year 27% higher at $1.27. Fiscal year 2012 is shaping up the same way. The original estimate for the year was for $1.57, their current estimate is $1.85 and my expectation is that Lulu will actually finish with EPS of $1.87, 2 cents above their newest update. See chart below.
Over the last 15 quarters, Lululemon has reported EPS that was on average $0.05 above their estimates. If you isolate the fourth quarter results, the average doubles to $0.10 above their estimates. As stated above, I expect the company will beat their own projected EPS in the fourth quarter of 2012 by $0.02 per share. This small $0.02 beat would represent year over year EPS growth of greater than 50%. See chart below.
What analysts should have noticed about Lulu’s press release is the company’s record setting profit margin. As I stated before, management believes that revenue will be close to $480 million with earnings of $0.74 per share for the quarter. Assuming that the diluted shares outstanding will be 145.9 million, we can expect net income of $108 million for the quarter.