Lululemon Athletica Inc. 's (NASDAQ: LULU ) 15% decline last week has made headlines. The company reported a decent second quarter after the close on September 1, but lower-than-expected guidance for the full year sent the shares tanking.
I was asked on Twitter if the weakness was a buying opportunity, so let me explain why I'm not touching the stock just yet.
In its recent second-quarter report, the company matched Wall Street estimates with 11.8% earnings growth to 38 cents a share. Revenue was up 13.6% to $514.5 million, driven by improved sales comps and an increase in square footage thanks to the opening of 43 new company-owned stores. However, the results fell short of expectations by about $1 million.
Comparable-store sales gained 3% in the quarter (4% on a constant currency basis), but the top line was affected by currency headwinds that held back results by $5.3 million, or 1%.
LULU Stock Looking Forward
For the current quarter, management expects revenue of $535 million - $545 million and earnings of 42 cents - 44 cents a share. And for the full year, guidance projects revenue of $2.32 billion - $2.35 billion on earnings of $2.07-$2.15 a share. This is what likely led to LULU's pullback, as Wall Street was looking for revenue of $2.34 billion and EPS of $2.15.
In addition, management noted that the company faced traffic headwinds in the second quarter and expects that weakness to continue through year-end. As a result, LULU has projected mid-single-digit sales comps, raising concerns about its ability to continue seeing solid growth.
LULU has been downgraded due to the weakness, with Jeffries moving the stock from a "buy" to a "hold" and lowering its target to $76 from $80 and Morgan Stanley revising its stance from "overweight" to "equal weight." The firm also reduced its price target to $70 from $74.
But my major concern here is increased competition. While LULU's sales growth has outperformed the majority of the apparel industry, Under Armour Inc (NYSE: UA ) still far outshines its peers with growth around 30% in each of the last four quarter. Plus, LULU is trading at a premium. The stock sold for an average 42X current earnings during the month of August, compared to Nike Inc (NYSE: NKE ) at 26.4X, VF Corp (NYSE: VFC ) at 21.5X and Gap Inc (NYSE: GPS ) at 12X.
I'm keeping an eye on the stock, and while it could present a good opportunity in time, I don't see any urgency to buy right now.
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