Thursday, December 10, 2009

lululemon is fairly priced....if it were the year 2014 (LULU)

Yoga and athletic-wear company lululemon (LULU) reported a good quarter last night, coming in 1 penny ahead of the expected 19cents in earnings per share for the third quarter. Gross margins rebounded nicely to the 50% area, and inventory looks tight going into the 4th quarter, a sign that margins should continue to hold up well.

Despite this, the stock is off almost 4% today, as people(myself included) have trouble "backing into" this stock price. lululemon has an incredibly loyal customer base, and their quality is fantastic. The problem is that the rich stock price is already discounting much bigger profits - so much so that it could take years for LULU to "grow into" this valuation.

Back in May, while I did say there was room for near-term upside,
I was skeptical of the longer-term:

"Today, management still plans on getting to 300 stores, and based on what they've shown so far I think their 19-20% operating margin is attainable also. But they're growing the store base 6% this year, with comps(sales at stores open at least one year) running negative double digits. That 300 stores and $1.4 billion or so in sales is way, way off in the future, as are free cash flows of any significance."

Here we are with the stock MUCH higher. The way I see it, LULU shares are discounting earnings and FCF levels in the 2013-2014 timeframe, based on a Free Cash Flow Yield(FCFY) of 7%.

CS today on LULU:

-->> Credit Suisse says they "cannot get over the valuation hurdle taking a long term view. Although one of the few growth concepts in retail, at 31x FY11 consensus, the stock is priced as if they had 300 N. American stores open, when this is not likely to occur for 5-10 yrs, if at all.

Copyright 2009 AlphaNinja


No comments:

Post a Comment