The fact that Lululemon is earning record setting profit margins of 20% or higher is even sweeter when you compare it to industry peers. In their most recent SEC filings, NIKE, Inc. (NYSE:NKE), The Gap (parent company of Athleta), and Under Armour Inc (NYSE:UA) all reported net profit margins below 10%. Under Armour, which is often compared to Lululemon, has struggled to produce the same high margins, even though both companies are growing rapidly and should benefit from increased economies of scale. Under Armour’s margins have been volatile, moving between 0% and 11% over the last 5 years, collapsing in first and second quarters. Unlike Lululemon, Under Armour has struggled to reduce SG&A as a percentage of sales and the seasonality of their business, both of which have taken a toll on the company’s earnings. See chart below.

These trends lead me to believe that Lululemon’s stock is a strong buy at current levels. I believe that fourth quarter 2012 revenue and EPS will both be above management estimates. I expect net revenue for the quarter to be $488 million, with EPS of $0.76 and total fiscal year 2012 earnings of $1.87 per share. If the stock continues to trade at a P/E ratio of 45, this will push Lulu to a new highs.

The article Don't Trust Lululemon's Management originally appeared on Fool.com and is written by David Jacoby.

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