Lululemon (LULU) was in the news yesterday, and finally for a good reason! Lululemon’s stock price suddenly increased on positive earnings estimates. So today’s post is cutting through the buzz and answering some key questions: why did the stock price increase, and is now a good time to get in?
Lululemon stock will always hold a very special place in my heart. Remember Warren Buffett’s advice to invest in what you know? Well I know Lululemon, and it was one of my very first investments. It’s also one of my best investments of all time. I bought it in 2011, traded it up and down a few times, and miraculously sold at $78, right before sheer-gate. So although I don’t invest in the stock anymore, I still track its progress like a proud parent.
Lululemon’s stock price went on a tear yesterday after it raised its fourth quarter earnings prediction. For Q4, Lululemon now expects net revenue of $595-$600 million, from $570-$585 million, and expects to earn between 71 and 73 cents per share, from 65 to 69 cents per share.
If you don’t remember, women complained in 2013 that downward dog turned into show-and-tell thanks to Lululemon’s sheer yoga pants. Afterwards, the CEO didn’t help matters by indicating that women of a certain size shouldn’t be wearing the pants. The subsequent media fallout, change in manufacturing, and shuffling of CEOs wreaked a bit of havoc on Lululemon’s sales and share price.
This earnings estimate revision was very good news to Lululemon investors, who weathered a drop from a high of $82 in 2013, all the way down to a low of $37 in June. After the share price rose for the second half of 2014, this news seems to confirm that LULU is finally back on track and putting the sheer pants debacle behind them.
To get to the question you might be wondering now; is it time to invest?
I’m a bit torn on the answer. On the one hand, the company’s sales growth would indicate yes. Lululemon added 16 stores in 2014 (including at Montgomery Mall!), and in turn saw a 27% year to date increase in direct-to-consumer sales. With the revised guidance, Lululemon is now headed for 14.2% – 15.2% annual sales growth.
Also impressive is the fact that Lululemon continues to be ranked third in sales per square foot, only behind Tiffany (TIF) and Apple (AAPL). Combine that with my absolute love of the product, and it’s a compelling reason to buy.
On the negative side, Lululemon’s expansion may have come at a price. Lululemon’s profitability has fallen during the past year as the percentage of costs attributed to selling, general, and administrative expenses increased 1%. That’s led the company’s operating margin to decrease from 29% in 2012 to 23% last quarter.
All in all, I’m hesitant to invest in Lululemon right now.
There’s a funny investing saying; “buy the rumor, sell the news.” In this case the earnings estimates are the rumors and the actual earnings report, which should be in March, is the news. I worry that there’s too much opportunity now for investors to be disappointed by Lululemon’s fourth quarter earnings announcement, and not enough room for a positive surprise. Not to mention, Lululemon almost always drops in price after an earnings announcement.
My plan is to wait until the earnings announcement and see if Lululemon lives up to the hype. If earnings are positive and the stock drops, I’ll consider buying some LULU shares at a “bargain” price.