LULU Pulls an Apple, Market Overreacts

NEW YORK (TheStreet) -- As the underrated pop band The Gin Blossoms says, If you don't expect too much from me, you might not be let down.

As a human who makes his way through this complex thing called life, I have taken those sage words on as one of my mottos. If I ran things at a public company, I would probably get it framed as the caption to a photo of an NHL goaltender about to make (or not make) a difficult save.

You can finish off the story in that photo however you like, but, whatever you do, keep an even keel. In life, in business and in the stock market, peaks and valleys are about all you can count on.

In the aftermath of Lululemon's ( LULU) rather weak earnings report, TheStreet contributor Brian Sozzi offered Barron's some bearish, but clearheaded reaction, noted in this excerpt from the article:
"Lululemon is facing an uphill battle expanding beyond core yoga gear (think running), entering the competitive waters dominated by Nike (NKE) and Under Armour (UA), both of which have stronger brand equity and better prices," he wrote in a note this morning. "There is only so much a company could raise prices before the consumer is turned off, and I think that is happening at Lululemon (I continue to see price increases on 'basics')."

I follow Sozzi on Twitter, read him on TheStreet and always get a lot out of his analysis.

That said, I diverge from Sozzi and other LULU bears on several points, particularly the one that, by intuitive default, puts Lululemon in competition with Nike ( NKE) and Under Armour ( UA). That's akin to telling Morton's that it competes with Outback Steakhouse.

Just as Morton's and Outback both make things you can eat, Lululemon, Nike and Under Armour each make things you can wear.

We can probably all agree that Morton's and Outback target a completely different clientele. Most people could probably achieve consensus on two other important distinctions between the two chains: One, Morton's serves higher quality (and more expensive) food; and, two, Morton's focuses on a small core offering whereas Outback tends to be, relatively speaking, all over the map.

By a similar token, Nike and, to a lesser extent, Under Armour are both all over the board. That's not necessarily a bad thing, as I admire and am generally bullish on both companies, but it does put them in a different league than Lululemon. Not a better or worse league, just a different one.

Lululemon is not, nor will it ever be, everything to everybody. Sure, it's expanding its line, but it's doing it in a much more focused way than Nike and Under Armour.

LULU moves beyond yoga to areas that are most likely to be relevant to its high-end core customer: swimming, cycling and such. And, on its move into cycling, for example, the company mitigates its exposure by not only starting small, but partnering with one of the world's biggest bicycle companies, Specialized, on clothing.

Compare the product lines at LULU, NKE and UA. It's quite obvious that LULU presents a much narrower focus than NKE and UA. Whereas LULU's future trajectory seems clear (concentrated on a handful of highly-targeted lines), NKE and UA tend to serve a wide spectrum of folks, ranging from casual sports fans to hardcore athletes.

As far as the stock goes, of course, it was set to get hammered on any whiff of seemingly bad news. The same thing has happened in the past. Growth stories, even great ones like Lululemon's, simply do not go up in a constantly straight line.

And, while LULU and Apple ( AAPL) are (obviously) in different leagues, it seems that the companies handle guidance in similar fashion.

Don't forget -- LULU beat its own EPS guidance for Q1. It also topped estimates. It has not missed earnings estimates -- ever -- since becoming a public company. And it always crushes its own guidance.

For the record, earlier this year, Apple guided lower for Q2 2012. We all know what happened there.

There's no doubt that, in the short term, I missed this one big. Serves me right for going against my own rule of playing growth stocks ahead of earnings.

In any event, I expect AAPL-like results, albeit on a smaller scale, from LULU later this year.

At the time of publication, the author was long LULU.

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