As the Dow continues to fly high, pointing to an expansion post the Great Recession, there are some stocks reaching their 52 week lows. The mighty Apple Inc. (NASDAQ:AAPL) is down to mid-$400s, despite release of any material public information to support the slump. The company is holding hoards of cash, has little to no debt, is making money quarter after quarter, sells premium quality products and maintains a strong brand recognition. Speaking of its attributes, one retailer stock pops up in my head that shares the exact same characteristics and has met with a similar fate – Lululemon Athletica inc. (NASDAQ:LULU).
Analysts’ curse
Now, I’ve reiterated this time and again that Lululemon Athletica inc. (NASDAQ:LULU) has a very conservative management. They have always been so in their earnings guidance and have more than a three year-long history of beating their own estimates each quarter. They are also conservative in their cash spending, as they so far refuse to pay out dividends or even buy real estate for their store locations. Additionally, management is averse to using too much leverage as it gradually expands its foothold to continents beyond North America.
Keeping this in context, imagine the management upping their own guidance just a month before the latest quarter earnings announcement. That’s right! Lululemon’s CEO, Christine Day, guided earlier last month that the company will be beating its previously guided EPS estimate of $0.71-$0.73. She also indicated that the company anticipates to earn revenue towards the higher end of $475-$480. Every quarter, Lululemon’s management proves its credibility by living up to its promises. Yet, the stock plummeted. It is very obvious that the company fell prey to the same analyst-victimization that Apple did.
Their dilemma is the same – the management gives a reasonable guidance but analysts decide to set it much higher and when the company doesn’t meet it, they jam the ticker feed with bearish calls. And then there are the Wall St. traders ready to take advantage of the following price slump. All of this despite the company being very profitable and generally having positive long term prospects and a very loyal customer-base.
It’s not over yet
Most critics connect lululemon’s success to a cult following, speculating that its high growth years are almost (or will soon be) over. I beg to differ. The company has so far reached just four countries and is still in its early expansion stage in all. Company store count grew by 27% in the past one year. In the third quarter 8 new stores were opened in the US, 3 in Australia and one ivivva (subsidiary of lululemon) store in Canada. For the fourth quarter, management guided to open 10 more. The company is in a nascent phase in its new markets of Hong Kong and New Zealand and hasn’t even touched the high growth emerging markets of Brazil, India, China and Russia, yet.
In addition to opening brick and mortar outlets, Lululemon Athletica inc. (NASDAQ:LULU) is also launching country-specific websites as it expands. LULU’s e-commerce segment accounted for 14.3% of the total revenue in Q3, up from 10.4% in the same quarter of yesteryear. You can get an idea of how important this direct-selling channel is by comparing lululemon’s last quarter comparable sales growth. During Q3, comparable sales grew by 18%, but add e-commerce sales and that growth jumps to 26%. Overall, the last quarter e-commerce sales grew by a whopping 89%, generating $45.1 million in revenue.
Remember, e-commerce sales result in high margins because of lower costs of sales. Christine Day has informed prior to the fourth quarter results that the company’s “gross margins are running slightly ahead of plan.” You wouldn’t be wrong to expect higher e-commerce sales to be the reason. I believe lululemon’s direct-selling segment has a very strong growth potential, and will further contribute to the compaany’s overall growth. In short, saying that lululemon’s high growth days are over is ridiculously unreasonable.
Of its competitors, Under Armour Inc (NYSE:UA) and The Gap Inc. (NYSE:GPS) are two of the closest. However, Under Armour’s focus on men’s wear and Gap’s greater size make the comparison inconsistent. Yet, generally speaking, lululemon seems like a much better investment.
Under Armour saw some very tough quarters up until 2012 during which period lululemon proved its mettle. Last year, however, was a turnaround story for Under Armour Inc (NYSE:UA) which made a massive comeback, opening new stores, beating earnings/revenues in all four quarters and touching its all time new highs. Yet, when compared to same-size lululemon, its return on equity is half that of lululemon and also has lower free cash flows. lululemon boasts higher gross margins by over 500 basis points and double the net margins than that of Under Armour Inc (NYSE:UA).
Likewise, lululemon’s better utilization of assets (more than double Gap’s return on assets) and its lack of long term debt make it more attractive against The Gap Inc. (NYSE:GPS) which offers a cheaper lulu-like athetic wear at Gap Athleta and also formally advertises using celebrity endorsements, unlike Lululemon Athletica inc. (NASDAQ:LULU). Yet, The Gap Inc. (NYSE:GPS) missed revenues in the latest quarter. Analysts are now also conservative about Gap’s ability to keep up its margins. Contrast this with LULU’s margins discussed above.
Lululemon’s strength, in addition to its superior quality and despite formal advertisement, is the loyalty of its customers to the ‘ohm’ symbol. The recent sell-off frenzy was definitely unwarranted. Another beat is coming in Q4. It’s time to load your portfolios!
The article Analyst-Cursed: This Retailer Is Still Cheap originally appeared on Fool.com and is written by Palwasha Saaim.
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