Why lululemon athletica's Shares Dropped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of yoga-gear giant lululemon athletica (Nasdaq: LULU  ) were getting bent the wrong way by the market today, falling as much as 13% in intraday trading after the company reported first-quarter results.

So what: The question many investors may be asking themselves is this: How in the world does a company grow revenue 53%, same-store sales 25%, and earnings per share 39% and still see its shares fall? It was indeed another great quarter for lululemon and the $0.32 in first-quarter per-share earnings that it posted did top analysts' estimates. But the company's forecast wasn't quite as nice.

For both the second quarter and full year, lululemon's updated guidance pegs its financial performance below Wall Street's targets. The midpoints of the respective second quarter and full-year EPS ranges are $0.29 and $1.58 versus analyst estimates of $0.33 and $1.63.

Now what: At the midpoint of its EPS guidance, lululemon would see 25% year-over-year growth. That's nothing to sneeze at, but it's disappointing when long-term growth estimates call for 27% annual growth and the stock trades at an aggressive 50 times trailing earnings.

So the takeaway for lululemon shareholders today is that the company itself is performing very well and managing some impressive growth. But because high hopes have been built into the stock price, the stock's reaction today is divorced from the company's solid performance.

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  • Report this Comment On June 08, 2012, at 3:35 AM, 1brayden wrote:

    There is nothing wrong with providing a conservative guidance. If history is used as a reference, Lululemon should outperform anyways.

    However for the difference of 3 to 4 cents the pounding the stock took is not warranted.

    Another item that you did not bring up is the extra inventory the company is now carrying. In prior quarters the company ran out of product to sell which resulted in lost potential revenues. They intentionally decided to carry more inventory to eliminate this problem and got beat up for it.

    What is wrong with the analysts? Do they not understand how a real business works?

    In my opinion this situation is either a complete disconnect or intentional manipulation to drive the stock down by shorting in large volume. If it is the later the share price will go up significantly and Joe investor gets screwed over again.

    Unfortunately, the reason cited will be some distant event ( like someone passing wind in Europe) that caused a mini rally. This scenario has been repeating itself so often this past month or so that it's no wonder why there is so much uncertainty.

    Call me a heretic, a non-capitalist, left wing socialist for even suggesting the following but what if the regulations were changed so that you couldn't short but rather had to own the stock to sell. Or maybe you had to hold a position for a minimum period of time before flipping it. Or that the larger companies paid the same amount as the retail trader for each trade so they couldn't mask their buying and sell trail via their multiple 100 share transactions.

    While I know this will not come to pass, it would certainly give companies a fairer valuation and level the playing field for the average investor.

    As it sits, the retail investor is getting scarce (as reflected in the overall volumes) and like the buffalo may never return to previous numbers.

    If it is about disconnection, and the big players are fretting that there isn't enough prey to get their double digit plus returns, then they have no one to blame but themselves. The economy is not in great shape but Mainstreet is surviving. If the doom and gloom were as bad as they paint were occurring on Mainstreet, I suppose we should expect anarchy really soon.

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