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Lululemon Drops as Outlook Signals Possible Slowdown

Lululemon Athletica Inc. (LULU) slid after forecasting fourth-quarter sales that trailed analysts’ estimates amid investor concern the Canadian yoga-wear retailer’s extraordinary growth may be leveling off.

The shares fell 3.9 percent to $69.47 at the close in New York, the lowest closing price since Dec. 5. The Vancouver-based company gained 63 percent in 2012.

Lululemon, which has posted double-digit gains in same- store sales for 13 straight quarters, yesterday said a high single-digit percentage rise in such sales prompted its forecast. While the company’s current store productivity is one of the strongest in retail, it isn’t sustainable as Lululemon expands, and its products may not resonate with customers in the 15 countries it’s entering, John Zolidis, an analyst at Buckingham Research Group in New York, said in a note today.

“The multi-year string of upside to analyst forecasts is coming to an end,” Zolidis wrote, citing slowing same-store sales, weak performance in new locations and costs tied to international growth.

The stock is “much too expensive,” he said. He estimates that Lululemon has an enterprise value of about 20 times projected earnings before interest, taxes, depreciation and amortization this year, compared with the 6.7 times ratio at other specialty retailers. Zolidis cut his recommendation on the stock to underperform from neutral.

New Locations

Revenue for the fiscal fourth-quarter ended Feb. 3 will be at the “high end” of an original forecast of $475 million to $480 million, based on same-store sales, Lululemon said in a statement yesterday. Analysts had projected $489 million, the average of 22 estimates compiled by Bloomberg.

While the stock is likely to retrench as investors “digest” the single-digit increase in same-store sales, Lululemon’s revenue growth is still healthy, bolstered by its U.S. and online businesses, Sharon Zackfia, an analyst at William Blair & Co. in Chicago, said in a note yesterday.

Lululemon, with 201 stores at the end of the fiscal third quarter, has almost doubled locations from three years ago, as it expands in the U.S. and Australia.

“It is important to remember that Lululemon’s quickly growing e-commerce business is not included in reported comps, and we estimate the business grew more than 80 percent in 2012, to 14 percent of sales from 10 percent in 2011,” said Zackfia, who has an outperform recommendation on the stock.

Express Gain

Lululemon made the announcement ahead of a Jan. 16 presentation at a conference held by ICR Inc. in Miami. Lululemon has announced its fourth-quarter outlook ahead of the conference for the past two years, Erika Maschmeyer, an analyst at Robert W. Baird & Co. in Chicago, wrote in a Dec. 20 note.

Profit for the period will be 74 cents a share, up from a previous forecast of a maximum of 73 cents. That matched the 74- cent average of analysts’ estimates. The period, which includes holiday sales, is the company’s biggest quarter.

Lululemon’s forecast doesn’t indicate any slowing demand for the brand as it made some “fixable” missteps with gift cards and faced an unusually long holiday selling season, Edward Yruma, an analyst at KeyBanc Capital Markets in New York wrote in a note today, boosting his recommendation on the shares to buy from hold. In the long-term, the company will operate more than 300 stores and get more than 25 percent of its sales from the Web, he wrote.

Express Inc. (EXPR), the apparel retailer targeting 20- to 30- year-olds, boosted its fourth-quarter profit forecast to as much as 74 cents a share from a maximum of 68 cents and said same- store sales were better-than-expected, according to a statement from the Columbus, Ohio-based company yesterday. Analysts had estimated 65 cents.

The shares soared 23 percent to $17.23, the biggest intraday gain since the company’s market debut in May 2010.

To contact the reporter on this story: Sapna Maheshwari in New York at sapnam@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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