Is Lululemon Really Turning Around?

Lululemon Athletica seems to be losing its shine, with growth slowing dramatically and increased competition from companies like Gap eating into sales. Can the company turn things around?

Apr 5, 2014 at 1:00PM

For a long time, analysts and investors alike were lining up to sing Lululemon Athletica's (NASDAQ:LULU) praises. The athletic-apparel company was delivering solid growth in a competitive industry and seemed to be outpacing its peers.

In recent times though, the company's performance has been seen slowing down. This could partly be due to a tough macro environment, but some are questioning whether or not the company will be able to regain its footing, facing increased competition from companies like Under Armour (NYSE:UA). Still, analyst upgrades continue to crop up. What's going on here?

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Source: Wikimedia Commons

Raising eyebrows and price targets
The yoga-focused athletic-apparel retailer's fourth-quarter report came as something of a relief to investors after a previous warning of a disastrous drop in comp-store sales starting in January. Fourth-quarter earnings per share of $0.75 beat the analyst consensus but were flat year over year. Still, one would think that investors used to Lululemon's massive earnings growth would have been somewhat put off by the figure. This was not the case.

The sales increase of 7% was considerably lower than what the company was able to deliver over the last few years. Even more worrying is that overall comp- store sales were down 2% for the period. The market's expectations must have been very low indeed, as the stock rose more than 6% following the report.

Analyst upgrades have for some reason still been coming in, the most recent of which coming from Wedbush. Citing a valuation more in-line with the industry average, a new CEO, priced-in negatives, and hopefully a bottom in the comp-store sales decline, the price target was raised from $54 to $64 and the stock given an outperform rating.

Still, it's hard to see where all this optimism is coming from, especially when one takes Under Armour's results into account. This apparel company is still delivering fantastic growth despite a tough market. Its fourth-quarter report showed a 35% increase in net revenue, with diluted EPS up 27%. The company actually managed to benefit from the cold winter weather, its fleece and ColdGear offerings selling especially well.

Turnaround in the cards?
Some analysts believe the company will be able to regain its previous growth figures. However, even Lululemon doesn't seem too sure of this, the company's outlook for the coming year not exactly oozing confidence. The company expects EPS of $0.31-$0.33 for the first quarter on revenue of between $377 million and $382 million, both coming in below the analyst consensus. Additionally, comp-store sales are expected to be flat year over year, while full-year comp-store sales growth is expected to be in the low- to mid-single digits.

Furthermore, Lululemon is going to have to watch out for some increased competition in its bread-and-butter yoga-apparel business. The Gap, Inc. (NYSE:GPS) has stepped up and is looking for some of this yogic pie as well, having recently launched its Athleta yoga brand and opening stores close to Lululemon locations. Employing some of the same strategies, such as sponsoring classes, Gap is looking to undercut Lululemon on price with its scale advantages. As such, it is difficult to see how Lululemon will be able to recapture its former glory.

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Source: www.athleta.com

The bottom line
Despite continuing analyst upgrades and a fourth-quarter report that came in above expectations, things don't look too bright for Lululemon. The yoga-wear powerhouse seems to be struggling with slowing sales and is also having some trouble growing the bottom line. Although some analysts are optimistic as to the company's abilities to turn things around, this doesn't seem too likely at the moment; a weak outlook and increased competition may weigh on the company's share price going forward.

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Daniel James has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica and Under Armour. The Motley Fool owns shares of 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.

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