Cautious Lululemon Research Report Actually Full of Very Positive Trend Metrics (LULU)

Lululemon Athletica Inc. (NASDAQ: LULU) was one hot stock.  A report from Credit Suisse shows very positive metrics for the company with high growth rates to continue for 5 years.  The problem is that the report is also cautious because of the valuations.  Credit Suisse initiated coverage with a Neutral rating and gave a mere price target objective of only $57.00 on the yoga-theme leader.  Why this matters is that earnings are due on Friday.

The report actually calls for 25%-plus annual earnings per share growth over the next five years.  That is even assuming a slowing in comparable sales.  Credit Suisse even noted positively, “…suggesting that lofty P/E multiples north of 35 are likely sustainable and a stock price above $60 is possible.”  The problem the firm has is the forward P/E of 37.5 against 2012 estimates, generating only a limited room for upside for the stock over the next year.

Going out to 2016, Credit Suisse sees earnings power of $3 billion and $3.80 EPS with its direct business having a potential of adding $500 million in sales and contributing 1.25% to 1.50% in operating margins.  That margin was listed as being 25.4% in 2010 but the report is calling for 30% operating margins down the road.

The sales projections are impressive.  Credit Suisse noted $1,800 per square foot, but noted that $2,300 per square foot actually looks conservative down the road.

The caution is based upon the following: a downside scenario comes to $28.00, a 5-year discounted cash flow target of $57.00, and a long-term growth driver of $67.00.

The details of the report are actually all positive, at least up to the point that valuation comes into play.  The estimates from Credit Suisse are $0.85 EPS in 2011, $1.10 EPS in 2012, $1.43 EPS in 2013, and $1.85 EPS in 2014.

The consensus earnings estimates from Thomson Reuters come to $0.22 EPS versus $0.15 EPS a year earlier, and there is a range of $0.21 to $0.25 EPS. This estimate has not changed significantly but we would note that the latest trend is for Lululemon to significantly beat earnings and raise guidance.  Revenues are expected to be almost $206 million for the quarter.

What we are seeing as a reaction this morning is that the street is looking at the positive metrics rather than the caution.  Lululemon shares are up 1.2% at $57.35 and the post-split adjusted 52-week trading range is $17.60 to $64.49.

JON C. OGG