In its never-ending growth story, Lululemon (NYSE: LULU) beat consensus estimates by $0.02, reporting EPS of $0.51. The company reported strong fourth quarter numbers yesterday begging the question, “Who ever thought yoga pants could sell so well?” The stock is held by Stephen Mandel, Scout Capital, Robert Bishop, and Mark Broach. Below are highlights from the earnings call:
Solid same store sales (SSS) growth of 26% not only beat consensus but also clocked in higher than the first three quarters of 16-20% of last year. Inventory was up 81%, and though rising inventory can be a sign of lagging sales, in LULU’s case it further demonstrates the rapidity of the growth the company is seeing. Management also noted there had been limited markdowns, which supported revenue numbers. Canada posted SSS growth in the fourth quarter in the low teens. Many see Canada as a leading indicator precursor to the US in terms of maturity of the operations—an estimated 3-4 years ahead of the US. Now in its twelfth year of operations, LULU’s Canadian business is still posting double digit SSS.
Sales per square foot increased to $2,004 in 2011. This is a widely used metric in retail to measure the efficiency of a store in generating revenues given the amount of space available—the higher sales per square foot, the better job management is doing. $2,004 is a 16% increase y-o-y, up from $1,726. Canada posted productivity of almost $3,000 sales per square foot, leaving LULU’s US operations with room to improve.
Gross margins declined to 56.3% from 58.5% in the previous year. This reflects inflationary pressures due to higher input costs. We think that this is a trend that is likely to continue, which will negatively impact Lululemon’s profitability if not managed accordingly.
Investments in supply chain are ongoing. Given inflationary headwinds, we view LULU’s investments in garment construction, fabric technology, and finishing in a very positive light. Product innovation using technical materials is still a major part of LULU’s strategy to drive productivity in its physical and online stores. Additional investments in its supply chain include “increasing the flow of product to stores and to localize product for different regions.”
Focus on new technical apparel products like swimwear, which will be introduced this year. The continual product innovation is positive. LULU has been successful in branching out beyond yoga i.e., products targeted at runners, cyclists, and dancers. Swimwear will be a focus of marketing and in-store displays in the spring and summer seasons.
Expansion opportunities in international markets is a point management emphasized. LULU now has a London showroom and one in Hong Kong set to open this year. eCommerce sites will launch in Australia, the UK, and Hong Kong this year as well. We think this is going to be a meaningful earnings driver in the future and are very bullish on LULU’s strategy and prospects abroad. Since execution will be a major factor in its success, it will be important to monitor the traction LULU gains in these markets. We continue to view the emphasis on eCommerce favorably as an opportunity to diversify LULU’s distribution channels. Margins are also better for the online sales, sales of which were up 100+% in the quarter.
Management’s guidance seems conservative. LULU expects Q1 2012 EPS of $0.28 to $0.29 and SSS of 20+%. FY 2021 guidance projects EPS of $1.50 to $1.57 and revenue of $1.3 billion to $1.325 billion. The company expects to open 7 stores in Q1 and 37 for the full year. We find this conservative for a number of reasons. The company has consistently beaten its margin guidance for the past two years due to more full-priced sales. The new line of swimwear, cold weather gear, and biking coupled with more sales from the men’s department should drive earnings higher. Additionally, the investment into improving inventory flow and growth from ecommerce should give a boost to the bottom line.
Our main concern surrounds valuation. At ~48.0x 2012 earnings, we believe current valuation reflects LULU’s growth opportunities and strong SSS fundamentals and leaves little margin of safety for the investor if there is a hiccup in growth. Compare that multiple to Skullcandy (NASDAQ: SKUL) with a 12.9x 2012 P/E, Under Armour (NYSE: UA) with a 42.3x 2012 P/E, Express (NYSE: EXPR) with a 14.5x 2012 P/E, and Zumiez (NASDAQ: ZUMZ) with a 25.6x 2012 P/E. Even though LULU is one of the fastest growers in the retail industry with a unique product and beloved brand, we are not sure we can justify a higher valuation at this time. However, the company is hosting an analyst meeting on April 11 in Vancouver, which may shed some light on additional valuation considerations.