Lululemon stock flops even as earnings soar

The athletic clothier is a case study in the high expectations for momentum stocks and the high level of fear in the market.

By InvestorPlace Jun 7, 2012 9:40AM
By Jeff Reeves

There aren’t a lot of growth stories on Wall Street these days, so when you see a stock posting numbers like Lululemon Athletica (LULU) is right now, investors should take notice.

The high-end athletic clothing store, best known for its yoga pants, just posted its 13th consecutive quarter of sales growth and its 11th consecutive quarter of profit growth.

Unfortunately, despite those numbers, LULU stock opened down 8% Thursday. That’s partially because of disappointing details about future sales but also about the fact that investors have almost no stomach for risk, even when it involves a stock with a great track record like Lululemon's.

Here are the details from Thursday's earnings report:

  • Revenue was $286 million on the quarter. That’s up 56% from Q1 last year and more than double sales from two years ago.
  • Same-store sales, a measure of performance at locations open for at least a year, were up 25%.
  • Earnings were up 40%, from $33.4 million to $46.4 million the previous year. Per share, that was a jump from 23 cents to 32 cents.

Not exactly reason to panic, right?

Well, there were two items from the athletic apparel company that investors latched on to with utter disregard for everything else. The company predicted same store sales growth would slow to the "low double digits" in the current quarter and into the future. Also, LULU noted full-year profit in fiscal 2013 will be as much as $1.60 per share, compared with the average forecast of $1.63.

In short, Lululemon may be growing at a fast pace. But for some investors, it's not growing fast enough.

You may be thinking this is your chance to get in on the dip. And I’ll admit that it's tempting. Back on Dec. 1 we saw a very similar script play out. LULU grew its revenue by "only" 30% and its earnings by 16%. The stock gapped down almost 19% at the open as investors freaked out, going from a close of $49.70 the day before to an opening price of $41.94.


But it ran back up to to a close of $47.80, down about 4% but hardly a brutal decline that signals disaster. One month later, it was back in the green and before Thursday’s sell-off was sitting on a roughly 40% gain from that low in December.


The company has a 52-week high of $81.09 – over 25% upside from here if all LULU does is reclaim that level. Also, the mean price target on Lululemon right now is $79.20, according to 15 analysts surveyed by Thomson/First Call and the median target is $83. So that’s not an unrealistic expectation to many.


Still, I'm not buying this "bargain" level for LULU. Because even if the company manages to convince Wall Street that its balance sheet is in good shape and its growth is secure, there’s very little chance that investors will feel comfortable about the big picture.


I’m talking about the fact that Europe’s debt crisis remains shrouded in uncertainty, China is showing signs of slower growth and the specter of another recession in America is looming large after a rather lousy jobs report last week.


Treasury yields briefly hit an all-time low recently because investors are just plain scared of stocks, no matter what the fundamentals are. Traders are going to cash and checking out for the summer.


And who can blame them?


So the story here is partially that LULU is a momentum stock, and these high-growth investments can turn in a hurry once the promise of future gains becomes less impressive. But bigger picture, this is a story of how investors don’t trust the market and don’t want to stick their necks out and take on any more risk than they have to. And while LULU isn't doomed after this report, the risks are clear and that is enough.


Lululemon was in the wrong place at the wrong time with Thursday’s report. Even in a bull market it can be difficult to convince investors to take a chance on a momentum stock that may be peaking.


And in times of crisis like these, convincing folks to overlook the bigger risks is downright impossible.

Jeff Reeves is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace​​.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the stocks named here.

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