Momentum Stock: Lululemon Athletica Inc.

Zacks Investment Research
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Lululemon (LULU)

Sometimes the strongest companies are not the ones you would suspect; at least not at first.  Who would have believed that a high-end yoga clothing store would have a market cap of 7 billion and earnings growth of 50%?

For most of us, selling Yoga accessories would be a niche market handled by smaller retailers or as a segment of a larger company like Nike or Adidas.  Lululemon has managed to not only ride the wave of Yoga popularity and culture, but to weave themselves into that lifestyle with expensive clothes that people can’t seem to get enough of! (They are going after runners and dancers as well)

Company Description & Developments
Lululemon is not only a retailer of Yoga and athletic attire, but their company is firmly entrenched in the culture of the people they sell to.  They are to Yogis what Starbucks is to yuppies; a destination that encourages social interaction while selling premium, quality products.

LULU got its start 20 years ago in British Columbia when their founder wanted to create better clothes to get sweaty in.  Now their sweat inspired brand reaches customers around the world with close ties to their local communities.  Their customer service and culture might be likened to Apple, which is obviously a retail leader with its cult-like following.

Traders have a tough time understanding Lululemon.  It’s price to earnings and sales multiples are sky high and it seems to almost defy gravity for a stock that seems to be selling to a limited market of mainly female Yoga followers. They seem to be adopting the philosophy that they make clothes for activities that make you sweat.  Perhaps their “sweat” angle and cultural influence might be the difference that maintains the momentum for this Canadian clothing retailer.  But without the “magic” that Apple products seem to have, it might be tough commanding high price and sales multiples without the growth to back it up.

For now, LULU is on the right track and has guided earnings estimates higher.  CEO Christine Day guided 4th Quarter earnings into the 55 to 57 cent range compared to the previously estimated 46 to 48 cents per share range.  Several analysts followed suit.  

Financial Profile
Lululemon is a mid-cap (6.9 billion) growth company that is trading at about 60 times trailing earnings (P/E).  Looking forward, Zacks Consensus Estimates are calling for that number to drop closer to 30 with no change in price from these levels 12 months from today.   It is important to note the high multiple and thus high expectations investors have for LULU.  Given the company’s confidence, strong results should be expected. 

Lululemon hit the Zacks Rank 1 Strong Buy list just yesterday.  In all fairness, it’s been ranked between a 1 and 2 since March 22, 2011

Lululemon reported a quarterly sales increase of 8% at their last earnings report.  The company saw a jump of 31% in sales year over year with total sales of roughly 711 million in FY2011.  LULU saw earnings growth of about 50% in the same period.  Lululemon is expected to earn $1.24 in FY2012 according to the Zacks Consensus Estimate. 

Earnings Estimates
Just about every analyst who covers LULU increased their estimates over the past 30 days, most likely after the statements by the CEO on January 10th.  We also noted several shifts more bullish shifts recently from Jefferies and KeyBanc.  FBR raised their price target to $70 and upped LULU to a strong buy on January 12th.   Lululemon will report Q1 (2012) results on March 8th.

Expectations are for the retailer to generate $0.49 in income this quarter.  Of the 20 analysts who cover LULU, the consensus is for the company to grow earnings by 58% in FY2012 and about half that growth (28%) in FY2013. 

In terms of the magnitude of analyst estimate trends, we are seeing all of the consensus estimates higher than they were 30 to 90 days ago from current quarter, out to FY2013.  This again reflects the bullish sentiments and elevated expectations for LULU.  Lululemon beat estimates last quarter by 8% and has managed to exceed consensus estimates for the past year by an average of about 14%.  The stock has generally responded well after earnings releases. 

Market Performance & Technicals
Lululemon had been trading in a range between $44 and $59 since July of 2011.  After a consolidation and wedge leading into the New Year, it recently broke out with strong momentum. 

LULU made another run at its 52 week high of about $64.50 a couple days ago.  The original high was made back in July.  Since then, LULU has been unable to overtake that level and has remained fairly sideways.

The stock is about 10% above its 50 and 200 day moving averages of $51.90 and $52.59 respectively.  The stock should find support around the $59.00 level and again around $54.00 in the near term. 

LULU might be sweating a bit itself; the stock has outpaced the S&P 500 by almost 80% over the past year and 30% just in the past month. Even during its consolidation, LULU has managed to exceed the broad market’s 12 week performance by 10%.  There are skeptics and proponents of LULU stock.  For now, the momentum lies in the hands of the believers.  If the CEO is that confident and the analysts are following her lead, it might be a stock to keep on your radar, even if it’s just Yoga clothes. :)

Jared A Levy is the Momentum Stock Strategist for Zacks.com. He is also the Editor in charge of the market-beating Zacks Whisper Trader Service.

 

 
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