Rising earnings estimates on the back of strong second quarter results, including a 16.1% earnings surprise, helped Lululemon Athletica Inc. (LULU) achieve a Zacks #1 Rank (Strong Buy) on September 12, 2012. Moreover, this retailer of yoga-inspired athletic apparel and accessories has continued its impressive trend of positive EPS surprises that stretches back several years.
Moreover, with a strong year-to-date return of 59.5%, robust results and a history of beating quarterly earnings estimates, this stock offers an attractive investment opportunity.
The Rank Driver
Solid second-quarter 2012 results, robust same store sales growth year to date, upraised forward outlook for fiscal 2012, and debt free and strong balance sheet – are the primary rank drivers for this stock.
Lululemon reported second-quarter 2012 earnings of 34 cents, which surged 30.8% from the comparable prior-year quarter, surpassing the Zacks Consensus Estimate of 31 cents, on the back of robust top-line growth, significant comparable-store sales increases and lower tax. Quarterly revenue of $282.6 million registered a 33% increase from $212.3 million in the year-ago quarter. Moreover, quarterly revenue was almost in line the Zacks Consensus Estimate of $283 million.
A 33% improvement in top line was aided by a 15% rise in same store sales in the second-quarter 2012, where as in the first quarter comps surged 25% driving a strong growth of 53% in the top line. Including the contributions from the e-commerce business, comps rose 23% in the second-quarter 2012.
Based on the strong second-quarter results, Lululemon raised its outlook for fiscal 2012 and expects total revenue in the range of $1.345–$1.360 billion, compared to its earlier guidance range of $1.32–$1.34 billion. Moreover, the company now forecasts an earnings range of $1.76 –$1.81 per share for fiscal 2012, whereas earlier it anticipated earnings to be in the range of $1.55–$1.60 per share.
Lululemon boasts a debt-free balance sheet, with cash and cash equivalents of $444.3 million at the end of the second-quarter 2012, exhibiting an improvement of 67.9% from the end of the second quarter of 2011.
Earnings Estimate Revisions
The Zacks Consensus Estimate for fiscal 2012 increased 10.5% to $1.79 per share based on 14 out of 14 upward estimate revisions over the last 30 days. The current estimate implies year-over-year growth of 40.9%.
For 2013, all 18 estimates were revised higher over the same time frame, lifting the Zacks Consensus Estimate by 8.7% to $2.24 per share.
Lululemon currently trades at a forward P/E of 41.91x, at a premium of 131.7% compared with the peer group average of 18.09x. The trailing 12-month ROE is 33.4%, significantly higher than the peer group average of 16.1%, indicating that the company reinvests its earnings more efficiently than its peer group. Moreover, the price-to-sales ratio reflects a premium of 903.3% to the peer group, with shares trading at a multiple of 9.23.
We believe the company’s premium is also warranted, given a long-term earnings growth rate of 29.0%, compared with the industry average of 14.8%.
About the Company
Founded in 1998 and based in Vancouver, Canada, Lululemon Athletica is a yoga-inspired apparel company engaged in designing, manufacturing and distributing athletic apparel for women and men. The company offers a line of apparel and accessories, including fitness pants, shorts, tops and jackets designed for athletic pursuits, such as yoga, dance, running, and general fitness under the Lululemon Athletica brand name. Currently, the company has a market capitalization of $10.8 billion.
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