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Lululemon Joins Nike and Under Armour in Downtrend Struggle

- By Sangara Narayanan

Lululemon Athletica (LULU), the Canadian athletic retailer, posted better-than-expected first-quarter numbers, beating analyst estimates on the revenue as well as the earnings front. After lackluster earnings from Nike (NKE) and Under Armour (UA)(UAA) over the past several quarters, sentiment was a bit bearish on footwear and apparel stocks; and, in a way, Lululemon's revenue growth of 5% during the first quarter makes it amply clear that all is not well in the athletic apparel and footwear world.

Lululemon reported earnings per share of 32 cents per share with revenues of $520.3 million while the market expectation was 28 cents per share in earnings on the back of $512.7 million in revenues. The earnings beat helped Lululemon break the downward trend its stock was tracking since third-quarter 2016, breathing some life into a stock that was down by more than 25% since the start of the year before first-quarter results came out.

The biggest factor that will weigh down the stock's price in the near future is comparable-store sales decreasing by 1% during the period. With Nike and Under Armour both reporting sales growth of 7% - much lower than their own targets set a year earlier - the whole industry seems to be on shaky ground. Nike was planning to hit $50 billion in annual sales by 2020 while Under Armour was trying to double its revenue within the next few years. But both companies were hit hard by the slowdown in the U.S., which accounts for a major portion of their revenues.

Lululemon's growth has also slowed since last year. During the first quarter of 2016, Lululemon posted sales growth of 17% as comparable-store sales grew by 6%. Sales growth is now down to 5% with comparable-store sales turning negative during the first quarter of the current fiscal.

The company expects comparable-store sales to turn positive sooner rather than later, as it has forecasted midsingle-digit comps for the next quarter as well as for the full year.

"For the full fiscal 2016, we now expect net revenue to be in the range of $2.305 billion to $2.345 billion based on total comparable sales in the midsingle digits on a constant dollar basis.

"Diluted earnings per share are expected to be in the range of $2.08 to $2.18 for the full year, or $2.05 to $2.15 normalized for the tax and related interest adjustments made during the first quarter of fiscal 2016." - Lululemon Earnings Release

Nike, Under Armour and Lululemon Athletica's stocks are now trading near their 52-week lows, and this is proving to be a difficult year for all three companies. The good news is that sales are still growing, albeit at a slower pace; the bad news is, unless the pace of growth accelerates, which is very difficult in the short term, stock prices will continue to be under pressure.

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.

This article first appeared on GuruFocus.