These days, it seems like nothing can stop the runaway success of lululemon athletica (Nasdaq: LULU). Its latest earnings report shows it once again besting analyst estimates and increasing revenue for 2010 by 53% over the previous year. Thus many an investor is left wondering why the stock has fallen since earnings were announced, instead of taking the nice bounce it did last quarter.
A good problem to have ...
The reason for the somewhat cautious approach by investors has to do with inventories. As CEO Christine Day talked about during the conference call, demand was far heavier for lululemon's clothing line in the fourth quarter of 2010 than expected. For any retail company, that's a great problem to have. Fellow retailers -- and athletic wear competitors -- Under Armor (NYSE: UA) and Nike (NYSE: NKE) would love to be saddled with such a problem, and Under Armour has inventory issues of its own (and not the good kind either). Just like Apple and the resounding success and shortage of its second-generation iPad, these inventory issues present themselves when you have the hottest product on the market.
... but a problem nonetheless
But because of these issues, lululemon will be unable to meet customer demand for much of the first half of 2011. CFO John Currie said "sales in the first quarter will be limited to a level of growth below the demand that we have seen ... and continue to see from our guests." In essence, this creates a ceiling for growth in the first half of 2011. When your stock sports a P/E north of 50, investors don't react favorably to profit slowdowns in the short term.
This also points out a glaring weakness in lululemon's ability to ramp up production in the short term. In fact, one of the key stumbling blocks for the company is that its deliveries from China will fall off significantly due to celebration of the Chinese new year.
Long term, things still look great
But such are the growing pains for a company like lululemon. Instead of viewing this as a huge problem, I see it as an opportunity. Management has shown remarkable talent in executing their growth strategy. I have no reason to doubt that they will learn from this inventory problem to ensure it doesn't rear its ugly head in an earnings report again.
On top of that, all of the key metrics remain more than healthy for the company. Its e-commerce site reached its goal of 10% of all revenue during the fourth quarter. The company will be opening as many as 30 more stores in 2011; and the new store openings in mid-America (where some thought the products wouldn't move as fast) have been resounding successes. It may take a quarter or two to resume the lightning-quick growth we're used to seeing, but by this time next year, I expect lululemon to be firing on all cylinders again.
