Lululemon Is at a Crossroads

With a difficult 2013 almost behind it, Lululemon and its shareholders have to focus on 2014 and beyond.

Jan 21, 2014 at 1:44PM

Lululemon Athletica (NASDAQ:LULU) continued its spectacular crash down to Earth the other week. Shares plunged over 15% after the company reduced its range of guidance for the fourth quarter.

While the extremely bad weather that caused Lululemon's comparable-store sales growth to slow is most likely only a short-term problem, there are still significant hurdles for the company to overcome in the future.

Guidance reduction
Company management reduced expectations for fourth quarter revenue and earnings per share. Lululemon now expects revenue to be in a range of $513-$518 million, which is down significantly from the previous estimate range of $535-$540 million. The key contributor to the disappointing adjustment is the company's slowing same-store sales growth that is expected to be negative in the quarter.

Earnings per share estimates were lowered as well. The company now expects EPS for the fourth quarter to be in a range of $0.71-$0.73, which is a significant decline from the Lululemon's previous estimate range of $0.78-$0.80.

Lululemon CFO John Currie explained, "We were on track to deliver on our sales and earnings guidance through the month of December; however, since the beginning of January, we have seen traffic and sales trends decelerate meaningfully." 

An overreaction?
An important thing for investors to remember is that Lululemon was not the only company with shares that fell significantly last Monday. While the company's worrisome report probably had an affect on other high-end retailers, the widespread drop in retail indicates that many other retailers were most likely affected by the drastic weather fluctuations as well.

Shares of Coach (NYSE:COH), Michael Kors Holdings (NYSE:KORS), and Under Armour (NYSE:UA) were all down significantly on Monday.

If the weather proves to not be as volatile going forward as it has been, then the company could very well end up exceeding its weak guidance in the fourth quarter. This would make the plunge in share price a good entry point for investors.

A long line of problems
The truly damaging aspect of the guidance reduction is that it occurred at the worst time imaginable for Lululemon. The company has been battling brand image concerns and public relations nightmares seemingly at every turn throughout the last year.

From former CEO Christine Day stepping down to founder Chip Wilson's insensitive remarks and subsequent resignation, Lululemon has not had stable leadership in a long time. This has hurt the company's ability to fight back against a deteriorating brand image, which was caused by 2013's see-through pants fiasco and that led to a massive product recall.

Growth appears intact
Thankfully, Lululemon's fiscal 2013 is almost over and the company and its shareholders can begin to look toward fiscal 2014 for a turnaround. The following is a breakdown of the yoga company's growth projections compared to some other aforementioned high-end retailers: 

Company

Coach

Lululemon

Michael Kors

Under Armour

Revenue Growth 2014

6.4%

17.2%

24.8%

21.9%

EPS Growth 2014

10.4%

18.4%

22.6%

23.6%

While only projected to grow better than Coach in 2014, Lululemon's expected growth is still impressive. Both revenue and EPS are expected to grow in the high teens.

However, shares of Lululemon look more attractive when we consider valuation. The company's forward P/E of 21.25 is slightly lower than Michael Kors' forward P/E of 22.12 and much lower than Under Armour's forward P/E of 47.94. Coach's forward P/E of 14.08 is the lowest by far, which is to be expected considering the company's growth is projected to lag significantly behind all other listed competitors. 

A lemon?
With a pretty bad 2013 about to come to a close for Lululemon, investors have to focus on the company's 2014 growth. While that may be difficult for some to do with a new and largely unproven management team just taking the reigns, growth for Lululemon seems set to get back on track.

There is no doubt that the company has work to do to win back favor from Wall Street and investors in general. The company also has to fight to keep current customers happy, however and more importantly it needs to attract new ones. Unless Lululemon can do this continuously, it is not a reliable growth investment. Therefore, investors might do well to wait and see if management can turn the ship around before investing.

Philip Saglimbeni owns shares of Under Armour. The Motley Fool recommends Coach, Lululemon Athletica, Michael Kors Holdings, and Under Armour. The Motley Fool owns shares of Coach and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers