Lululemon Athletica is up 5% this morning after the company released positive guidance and sales data, quelling short sellers and bearish opinions on the company. Lululemon updated guidance for fourth quarter 2014 from earnings per share of $.65-$.69 to $.70-$.73. The company also took the opportunity to raise full year earnings per share estimates for 2014, 2015, and 2016. Original estimates showed $1.78 for full year 2014, $2.00 in 2015, and $2.29 in 2016. Now the company expects to post full year earnings per share of $1.81 in 2014, $2.08 in 2015, and $2.38 in 2016. Lulu also said they are expecting same store sales growth between 6-7%, compared to fourth quarter 2013 same store sales of 4.2%.
Analysts at Sterne Agee have upgraded shares of Lululemon from underperform to neutral, saying that the “current business is healthier than anticipated”. However, Sterne Agee analysts still are concerned with the level of spending the company is doing to take the brand more international, believing that earnings could continue to take a hit as a result. Additionally, the analysts think that the company is still overvalued at roughly 30 times full year 2015 estimates.
Certainly, the stock is overvalued compared to the overall market, but the company has showed time and time again that they are resilient and that they have a loyal customer base. Known for starting the “yoga pants” revolution, they certainly have introduced a widespread and popular product into the marketplace. It always seems that when bearish sentiment starts to mount against Lululemon, they are able to bounce back and make the disbelievers wrong. With 19.33% short float, there is certainly a presence of short sellers that believe the company could go lower. However, the company has no debt, good cash on hand, excellent management efficiency ratios (ROA of 18.60%, ROE of 21.40%, and ROI of 25%) and margins (GM of 51.50%, OM of 21.70% and PM of 13.90%). However, as the Sterne Agee analysts noted, earnings growth is expected to take a hit over the next year or two, due to increased spending to get the brand international. Earnings for this year are expected to rise only 2.70%, 14.30% next year and 15.59% over the next five years. This compares to earnings per share gain of 45.80% over the past five year and sales of 35.10% over the past five years.
While the company has continued to remain resilient and has created a very successful and popular product, they certainly are making a big push for international exposure, and an unsuccessful entry into these markets could have long term devastating effects on the company’s bottom line. However, for now, the company is showing better than expected results and sees the next couple of years rising above prior estimates for full year earnings per share results.