With some 30% of its revenue coming from outside of the U.S., the retailer of yoga apparel was facing a negative earnings impact from the strong U.S. dollar devaluing those overseas sales.
However, the Vancouver company surprised everyone by topping Wall Street's earnings targets and giving a full-year 2015 business outlook of revenue growth of more than 12% and earnings per share of $1.93.
Investors holding LULU stock are feeling pretty good right now even though the shares, at around $66, are down about 3% currently. They are up nearly 19% for the year compared with the S&P 500, up 1.8% for the period.
However, while shares aren't cheap at 41 times earnings, or 20 points higher than the S&P 500, what's more important to consider is how quickly LULU can meet the profit growth implied by its high price to earnings ratio. Assuming LULU does meet average analysts' full-year 2015 earnings estimate of $1.93 per share, this puts the company on track to grow the fiscal-year 2016 consensus earnings estimate of $2.33 by 21% year over year.
A market leader like LULU that is growing earnings above 20% makes the stock a solid value play relative to the overall market, especially since the company has beaten Wall Street's earnings targets for 10 straight quarters.
The projected earnings estimate of $2.33 for the full year drops the forward P/E to 27. For some context, a forward P/E of 27 -- while it may be high relative to an average forward multiple of 17 for the S&P 500 -- shows LULU is not only comparable Nike (NKE) (forward P/E of 26) but much cheaper than Under Armour's (UA) forward multiple of 57.
For the quarter that ended in May, the Canadian retailer posted a profit of $47.8 million, or 34 cents per share, more than doubling last year's profit of $19 million, or 13 cents per share. LULU benefited from comparable-store sales that climbed 6% year over year. Revenue for the period climbed 10% year over year to $423.5 million, topping average estimates by $4.5 million.
It wasn't a flawless quarter. That gross profits fell some 230 basis points to 48.6% of sales was a minor red flag. While LULU did beat average earnings estimates by 1 cent, operating income took a step backward, yielding 210 basis points.
What's encouraging despite these minor setbacks is LULU opened 53 additional stores during the quarter, bringing its total store count to 316. It costs money to open new stores, which requires various promotions to generate traffic. This would explain the 33% rise in store inventories and the slide in both operating income and gross profits.
Assuming operating margins and gross profits will trend higher in the quarters ahead, now is the time to own LULU stock, which has a consensus buy rating and an average analyst 12-month price target of $70, suggesting 10% gains from current levels.