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Lululemon Athletica

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In the past week, every analyst estimate on Lululemon Athletica Inc. (LULU - Free Report) has been revised higher for both this fiscal year and next. Such unanimous agreement shows why this retailer of yoga-inspired athletic apparel and accessories is a Zacks #1 Rank (Strong Buy) with solid aggressive growth potential.

Last week, LULU posted a fiscal second-quarter 2012 earnings surprise of 16.1%, which continued its impressive trend of positive EPS surprises that stretches back several years. Other positive factors in the quarter included solid same-store sales growth and an impressive forward guidance. Shares have soared nearly 44.1% since last month.

Fiscal Q2 Beat, Promising Outlook

On September 7, Lululemon Athletica posted solid second-quarter 2012 results on the back of robust top line growth, significant comparable-store sales increases and lower tax. Earnings of 34 cents per share surged 30.8% from the prior-year period, beating the Zacks Consensus Estimate of 31 cents per share.

Revenue of $282.6 million increased 33% from $212.3 million in the year-ago quarter, while just missing the Zacks Consensus Estimate of $283 million. Revenue growth mainly rode on a 15% upside in comparable-store sales, a 91% jump in Direct-to-Consumer revenue and new stores added to the company’s portfolio.

Direct-to-Consumer revenue of $35.4 million represented about 12.5% of the total revenue. Corporate-owned stores contributed about 81.9% to total revenue at $231.3 million. Other revenue, including wholesale; showrooms; outlets; and, until last year, franchised stores, totaled $15.9 million, accounting for about 5.6% of the total revenue.

Operating income increased 18% to $70.2 million compared with $59.5 million a year ago, while operating margin contracted 320 basis points to 24.8%. The company’s effective tax rate declined to 29.2% (on an adjusted basis) versus 35.7% in the year-ago quarter, driven by the ongoing impact of the revised intercompany pricing agreements.

For fiscal 2012, management expects revenue between $1.345 billion and $1.360 billion with earnings per share between $1.76 and $1.81. Moreover, the company anticipates shares outstanding of 145.8 million and a tax rate of 28.9%.

ALL Earnings Estimates Revised Higher

The Zacks Consensus Estimate for fiscal 2012 rose 10.5% to $1.79 per share in the last 7 days, as all 14 estimates were revised higher. This guidance suggests year-over-year growth of 42.1%.

The Zacks Consensus Estimate for fiscal 2013 increased 8.7% to $2.24 per share over the same time frame as all 18 estimates moved upwards, reflecting a year-over-year growth of 25.1%.

Valuation Looks Chic

Lululemon Athletica currently trades at a significant premium to the peer group with a forward P/E of 42.7x, compared to the peer group average of 18.0x. The company’s price-to-book multiple of 16.4 also implies a substantial premium to the peer group multiple of 2.4. Furthermore, the company currently has a PEG ratio of 1.5 times, a premium of 50% to the benchmark of 1 for a fairly priced stock.

Nevertheless, the stock looks attractive given a trailing 12-month ROE of 35.1%, which is substantially higher than the peer group average of 13.6%. We believe the company’s premium is also warranted given a long-term earnings growth rate of 29.0%, compared with the industry average of 14.8%.

Charts Reflect Growth

The chart below reflects sizeable growth in the company’s share price over the past six months, recording a year-to-date return of 63.5%. Moreover, the year-to-date return for the stock compares favorably with the S&P 500’s year-to-date return of 12.5%.

Shares of this apparel retailer currently trade above the 50 and 200-day moving averages, and have been doing so since August 15 and August 22, respectively. Lululemon Athletica has a market cap of $11.07 billion, while the average trade volume is 2,932K.

Founded in 1998 and based in Vancouver, Canada, Lululemon Athletica is a yoga-inspired apparel company engaged in designing, manufacturing and distributing athletic apparel for women and men. The company offers a line of apparel and accessories, including fitness pants, shorts, tops and jackets designed for athletic pursuits, such as yoga, dance, running, and general fitness under the Lululemon Athletica brand name. Its fitness-related accessories comprise an array of items, such as bags, socks, underwear, yoga mats, instructional yoga DVDs, water bottles, and headbands. As of July 29, 2012, the company operated about 189 stores in North America and Australia.

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