Are Lululemon's Best Days Behind It?

Source: Wikimedia Commons

Heading into lululemon athletica's (NASDAQ: LULU  ) fourth-quarter earnings on March 27, investors are filled with optimism. With shares up almost 4% on Monday, investors appear hopeful that the business will report satisfactory earnings and rebound after the stock plummeted from its 52-week high. Is this a logical course of action? Or are shareholders mistaken in placing their trust with the brand and subjecting themselves to significant downside?

Mr. Market has mixed expectations!
For the quarter, analysts expect Lululemon to report revenue of $516.8 million. This represents a 6% gain compared to the $485.5 million the business reported in the year-ago quarter. If the past is any indication, a revenue increase would stem from the addition of retail locations and an increase in comparable-store sales.

  Expected Revenue Growth Expected Earnings Growth
Lululemon 6.4% -4%

Source: Yahoo! Finance

In terms of profitability, Mr. Market isn't as optimistic. For the quarter, analysts anticipate earnings per share of $0.72. This would represent a 4% decline compared to the $0.75 Lululemon reported in the fourth quarter of 2012. According to Mizuho Securities, a profit decline would likely be attributed to higher selling, general, and administrative expenses that could harm the business' bottom line.

How does Lululemon stack up against its peers?
Over the past four years, Lululemon has demonstrated an amazing ability to grow, both in terms of revenue and profits. Between 2009 and 2012, for instance, the company's revenue jumped 203% from $452.9 million to $1.4 billion. This increase was mainly due to comparable-store sales growth combined with a rise in the number of locations in operation.

  Revenue Growth Net Income Growth
Lululemon 202.6% 364.2%
Nike 33.1% 30.3%
Under Armour 114.3% 175.2%

Source: Yahoo! Finance

Between 2011 and 2012 alone, the company saw its top line jump 37% from $1 billion to $1.37 Billion. This increase was fueled by 37 new stores added accompanied by a 16% rise in comparable-store sales. If analysts are correct about the company's fourth quarter, management will report revenue of nearly $1.6 billion for the year. This will imply a slower growth rate of 16% compared to 2012 but is far from lackluster.

Lululemon's growth rate over the past four years is far greater than the 33% jump in sales Nike (NYSE: NKE  ) reported over a similar time frame. Between 2010 and 2013 (with both companies having different fiscal years, which makes comparability challenging), Nike grew its top line from $19 billion to $25.3 billion. According to Nike's most recent annual report, its sales have been driven largely by a jump in comparable-store sales.

Another interesting prospect for the Foolish investor is Under Armour (NYSE: UA  ) . Between 2009 and 2012, the company's revenue soared 114%% from $856.4 million to $1.8 billion. Management attributed the performance to the company's strong brand, which propelled revenue an extra 27% higher in 2013 with sales of $2.3 billion.

In terms of profits, Lululemon performed even better. During the past four years, the company saw its net income skyrocket 364% from $58.3 million to $270.6 million. In addition to benefiting from rising revenue, the company was able to reduce its cost of goods sold from 50.7% of sales to 44.3%; its selling, general, and administrative expenses declined from 30.1% of sales to 28.2%.

Lululemon's performance outpaced Under Armour's 175% increase in net income from $46.8 million to $128.8 million. It also made Nike's 30% jump in net income from $1.9 billion to $2.5 billion look subpar. Due to Nike's larger size, it's understandable that the company's growth couldn't keep up with its smaller peers. But the very fact that Lululemon outperformed Under Armour as well makes its value proposition enticing.

Foolish takeaway
Unfortunately, nobody knows exactly how well Lululemon will perform for the quarter. But with its shares trading for 27 times earnings compared to Under Armour's 79 times and Nike's 28 times, it's hard to argue that it doesn't make for a good prospect. Although the coming report will say a lot about how the company is doing now, its past performance suggests that the Foolish investor may find a relatively cheap, fast-growing business like Lululemon appealing.

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In spite of any short-term troubles facing the company, it's hard to argue that Lululemon hasn't been a great stock to own over the past few years. However, is the company ready to continue its historic growth, or are there better opportunities for the Foolish investor?

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