lululemon athletica (NASDAQ:LULU) once had the most coveted business accessory of all: a cult-like following of loyal customers. But then, controversial comments from founder Chip Wilson created a PR nightmare, the company's previous CEO Christine Day unexpectedly resigned, and see-through pants forced the yoga apparel retailer to pull more than 17% of its signature luon pants from store shelves. Shares of Lululemon suffered greatly because of these missteps.
However, the luxury yoga and fitness brand has since put these issues behind it. Under new chief executive Laurent Potdevin's leadership, the company and its stock are starting to recover. Lululemon stock is up nearly 10% year-to-date, though that still lags industry rival Under Armour (NYSE:UAA), which has gained more than 15% over the same period.
With the retailer set to release fiscal 2015 first-quarter results next week, investors want to know if Lulu has what it takes to top analysts' estimates.
Historically, Lululemon has done a great job of under-promising and over-delivering when it comes to quarterly earnings. In fact, the company has topped Wall Street's estimates in each of the past four quarters. Unfortunately, this time could be different. Despite the retailer's recent troubles, Wall Street's high expectations for the company are still intact.
Analysts, for example, expect Lululemon to deliver first-quarter earnings of $0.33 per share, on revenue north of $418 million in the period. Both of those figures mark the high end of the company's projections. Lululemon has forecast Q1 earnings in the range of $0.31 to $0.33 per share and revenue between $413 million to $418 million.
Additionally, even if Lululemon does report earnings-per-share of $0.33 for the first quarter, it would still be a slight decline from the year-ago period. That might not be enough to push the stock higher, especially given rival fitness brand Under Armour's blowout numbers in its first quarter.
Under Armour reported impressive Q1 earnings in April, supported by revenue growth of more than 25%, thus marking 20 consecutive quarters with net revenue growth north of 20%. Since Under Armour is one of its biggest rivals, this creates immense pressure for Lululemon to knock it out of the park.
Alas, Lulu is more likely to deliver results that are in-line with expectations rather than surprising to the upside. Not only is the athletic apparel market saturated with competitors today, but Lulu is also in a transitional phase right now and experimenting with new seasonal product lines that could negatively impact its profit margin.
Simply meeting Wall Street's expectations probably won't move the needle for the stock. Lululemon needs to deliver a blowout quarter if it wants to truly regain investor confidence.
Furthermore, the stock still looks expensive despite a 12% decline from its April highs. This is particularly true given Lululemon's price-to-earnings growth ratio of 2.21, which is above the industry's average. Shares also trade at more than 36 times earnings, affording Lululemon one of the highest P/E multiples in the Apparel and Luxury Goods industry.
For these reasons, I believe investors should avoid adding more downward dog to their portfolios ahead of Lulu's earnings announcement next week.