Green Living
lululemon athletica inc. LULU – $32.22
Buy Price Target: $45.00
LULU Reports Impressive Sales, Higher Expenses; Buy On Dips For The Long Term
THINK ACTION:
lululemon reported higher-than-expected revenues, due to successful new store openings, and in-line EPS for the company's Q108. LULU, however, reported a lower-than-expected operating margin and reduced EPS guidance for 2008, implying that this trend will continue in the near term. The increased SG&A expenses in 2008 seem to be entirely related to investments in the business, such as key hires and strategic systems initiatives. Demand remains strong, and we continue to believe that guidance on comps for the year is conservative. Any dips in the stock that result could create very good buying opportunities, in our opinion.
KEY POINTS:
Revenue
The company reported revenue of $78.2 million (up 75%), $10 million higher than our estimate, based on 28% comps (as expected) with a 13% currency benefit, and new store productivity that was higher than we had anticipated.
The company reiterated its comp guidance of low teens for the year, yet raised its revenue guidance, as the new stores opening in May (in the second-tier cities of Halifax, Nova Scotia, and Troy, Michigan) were reportedly the most productive new store openings in the company's history.
We continue to believe that comp guidance, and therefore revenue guidance, are extremely conservative, as we see no reason for the sudden drop off in comps from 15% before currency benefit down to the high single digits. However, as the management does have more visibility now into the year than it did in March, we are lowering our comp estimate accordingly from 18.5% to 15% for the year.
Expenses
EPS was reported in-line with our $0.12 estimate, but 2008 guidance was reduced from $0.70-0.72 to $0.68-0.71, all due to increased SG&A expenses which seem entirely related to necessary, long-term investments in the business, such as key hires and systems initiatives.
One example is the hiring of Sheree Waterson as EVP General Merchandise Management and Sourcing. Waterson was most recently President of the Speedo brand and prior to that served as VP Merchandising, Women's, for Levi Strauss. Management roles should also be filled this year in the areas of operations and logistics.
The company also plans to add assistant managers to every store and provide more training for managers so that the store leadership will be better prepared for growth.
What to Take Away
Demand for lululemon's product remains strong, and the company is making the investments we believe are necessary to become a much bigger organization in the future. We believe that lululemon will be seen as one of the best growth stories over the next decade, and that investors should take advantage of any short-term hiccups to buy the stock.
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