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Is Selling Lulu a No-No?


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Often one of the toughest decisions a Foolish investor has to make is what to do when a strong company like lululemon athletica reports fantastic results but issues an outlook that is somewhat weak. Buy, hold, or sell? Judging by recent results from competitors Under Armour and Nike  the right thing to do for long-term investors may be just to stay the course.

Lululemon's results
Lululemon reported fiscal third-quarter results on Dec. 12. Net revenue rocketed 20% to $379.9 million. Same-store sales jumped 5%. Net income leaped 15.4% to $66.1 million or $0.45 per share. It's hard to argue that these were bad results.

CEO Christine Day pointed out that the results included sales in line with the company's expectations, earnings that beat its guidance, and earnings growth that returned to a double-digit run rate. While the company guided for a disappointing fourth quarter, which Day attributed to "both macro and execution issues," she still expects growth to come for years ahead. This suggests the weak quarter ahead will be part of these rapid growing pains.

For the fourth quarter, Lululemon expects sales between $535 million and $540 million, flat same-store sales, and earnings per share between $0.78 and $0.80.

In the conference call, CFO John Currie warned, "We've experienced a soft start to the fourth quarter." He explained that the supply chain had a large number of hires who are going through training or gaining more experience, which will help out in future quarters.

Lululemon may have been growing faster than it can handle in such a short amount of time. Over the long term, it's a great problem to have. Currie believes that this problem temporarily cost the company sales and orders, but Lululemon has gotten up to speed and it should be back on track in future quarters.

On top of all of this, Lululemon said it is seeing "a slowdown in traffic to our stores" and "a difficult macro retail backdrop, with all retailers experiencing lower traffic." You have to admit -- with all of these problems, Lululemon is still holding its head above water for the fourth quarter, plus it has a good outlook for beyond then. Lululemon identified its problems, put the fixes in, and solved the problems. Now, to quote Currie, "As we go through next year you'll see continued improvement in product flow."

What about others such Under Armor and Nike?
Last quarter, Under Armour saw similar outstanding growth. Net revenue jumped 26% to $723 million. Earnings per share also leaped 26% to $0.68. It was the 14th quarter in a row of net revenue gains over 20%. http://finance.yahoo.com/news/under-armour-reports-third-quarter-110000919.html

CEO Kevin Plank said that Under Armour saw "success across our business." He credited the success with the company's "newness and innovation" that the customer is responding to. This suggests that despite the challenges in the economy, guest will still open their purses and wallets for the type of products Lululemon and Under Armour sell.

Meanwhile, Nike reports after hours on Dec. 19.  Last quarter Nike showed strong growth percentages despite its already enormous size.  Revenue was hopped 8% to $7.0 billion.  Future orders also rose 8%.  Diluted earnings from continuing operations exploded 37% to $0.86. http://finance.yahoo.com/news/nike-inc-reports-fiscal-2014-201500826.html

CEO Mark Parker credited the success with "delivering innovative products" just like Under Armour and Lululemon.  Nike expects its continued innovation to fuel more growth.

Foolish final thoughts
One quarter doesn't make any company, and Lululemon is no different. With very strong historical results and an optimistic outlook for 2014 and beyond, Fools may want to consider forgiving Lululemon and keeping it on watch. The long-term profitable growth trend is still in place while others in the industry such as Under Armour and NIKE prove that it's still possible to grow significantly in this environment. If the stock pulls back further with no new public or macro news, it may be an opportunity to snatch a long-term winner at a discount.

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The article Is Selling Lulu a No-No? originally appeared on Fool.com.

Fool contributor Nickey Friedman owns shares of Lululemon Athletica. The Motley Fool recommends Lululemon Athletica. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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