The Gap Inc. (GPS) – Lululemon Athletica inc. (LULU): An Earnings Preview

Page 1 of 2

Lululemon Athletica inc. (NASDAQ:LULU), the yoga and athletic lifestyle apparel retailer, reports second quarter results on Sept. 12. Analysts will  want to know how the new CEO search is coming along, as well as any lingering effects from the “I see London-I see France, I see through your yoga pants” recall that hit the stock in March.

Lululemon Athletica inc. (NASDAQ:LULU)

The company beat on both the top and bottom line when it reported on June 10 despite the $17 million hit it took on the Luon yoga pant recall. Christian Buss, of Credit Suisse, noted in March ,”With the black Luon pant recall Lululemon Athletica inc. (NASDAQ:LULU) has now had its fourth quality control issue in the last year.”

The company reported fourth quarter earnings in March. CFO John Currie said that in addition to the $17 million loss for the first quarter, Lululemon Athletica inc. (NASDAQ:LULU) expected “additional lost revenue of $45 million to $50 million for the balance of the year, primarily in the second quarter, spread over new and existing stores and e-commerce.” (source Seeking Alpha transcript)

Then in June CEO Christine Day announced she was leaving but would stay on through a CEO search. Lululemon Athletica inc. (NASDAQ:LULU)’s stock had soared under her leadership as the company used a marketing strategy based on scarce inventory. All told, she lasted five plus years, or as long as a pair of the company’s yoga pants.

It has been a tough six months for Lululemon. Analysts have lowered the bar, with several downgrades immediately succeeding the recall.

When it comes to fabric innovation, building a niche brand, growing a fervent customer base, and online marketing, few companies beat Lululemon Athletica inc. (NASDAQ:LULU). This shows why the stock climbed from $5 in 2009 to $50 by 2011. With Lululemon there is so much to love: community outreach through its yogi ambassadors and company run fitness events, its strong social and web presence, but sizzling growth… not so much anymore..

Earnings past is prologue
First quarter earnings showed a deceleration in same store sales increases, from 10% in the fourth quarter to 7%, but online sales grew 40% from the year ago period (85% rise in 2012) and accounted for 15.6% of revenues. Meanwhile, its gross margin dropped from 56.5% in that fourth quarter to 49.4% in the first quarter.

The torrid EPS growth rate of the last five years of 57% has now been adjusted downward by analysts for the next five years to 22.15%, befitting a maturing company. Although Lululemon Athletica inc. (NASDAQ:LULU) has no debt, is expanding into men’s and girls’ lines, and opening more stores, it’s not as attractive an investment as before.

The company still has the problem of an immature supply chain. Witness the Luon debacle, in which only one Taiwanese company contracts to manufacture the fabric. Analyst Sam Lee of International Strategy and Investment Group told clients, “We would really like to see the company more aggressively invest in and exercise greater control over its supply chain given the importance of quality and consistent fit to the Lulu brand promise.”

Without the promise of accelerating growth, and with the market valuing sales at a 7.19 multiple and earnings at a 38.29 multiple it’s hard to justify leaping back into the stock. The number of competitors has grown as well, including L Brands Inc (NYSE:LTD), which owns PINK and Victoria’s Secret, The Gap Inc. (NYSE:GPS) Athleta line, Under Armour, Nike, and any number of smaller private rivals.

Did rivals take share?
Lululemon’s most serious competition is The Gap Inc. (NYSE:GPS) and L Brands Inc (NYSE:LTD), as yoga wear has become not only mainstream but fashionable. Both Nike and Under Armour’s yoga wear lines are utilitarian, with little style, although they are cheaper than Lululemon.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

6 Ways to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

The 20 Biggest IPOs in US History

The 10 Best Places to Visit in Mexico that Are Beautiful and Safe

7 Bad Habits that Age You Beyond Your Years

The 40 Best Fortune Cookie Sayings That Will Leave You Bemused, Befuddled, or Beguiled

10 Foods to Eat Before a Workout to Make Every Drop of Sweat Count

The 5 Best Documentaries On Netflix You Must See

The Most Heartwarming and Inspirational Story Of This Halloween Season, It Will Make You Cry and Jump For Joy

10 Best Party Songs of All Time to Bring the House Down With

5 New World Order Conspiracy Theories that Will Strangle the World

The 10 Highest Rated Movies of 2014

The 10 Largest Container Shipping Companies in the World

The 10 Largest Armies in the World: Who Should We Be Afraid Of?

Best Warren Buffett Quotes on Money You Need to Hear

The 10 Highest Suicide Rates by Profession

The 20 Most Underrated Movies of All Time

The 10 Fastest Growing Companies in America

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!