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Lululemon Is at a Crossroads

By Philip Saglimbeni - Jan 21, 2014 at 1:44PM

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

Lululemon Athletica (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 (TPR), Michael Kors Holdings (CPRI), and Under Armour (UAA) 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.

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Stocks Mentioned

Under Armour, Inc. Stock Quote
Under Armour, Inc.
UAA
Capri Holdings Limited Stock Quote
Capri Holdings Limited
CPRI
Tapestry, Inc. Stock Quote
Tapestry, Inc.
TPR
Lululemon Athletica Inc. Stock Quote
Lululemon Athletica Inc.
LULU

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