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Why Did LULU’s Stock Price Fall after Its 2Q16 Earnings Release?

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Sep. 7 2016, Updated 10:04 a.m. ET

Stock price falls despite strong fundamentals

So far in this series, we’ve evaluated Lululemon Athletica’s (LULU) performance in 2Q16. The company delivered a strong 13.6% YoY (year-over-year) growth in its top line and an 11.8% YoY growth in its earnings per share (or EPS). However, LULU’s stock tanked by 10.6% on the day following the earnings release. In this part, we’ll assess the key reasons behind this decline.

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Earnings were in line with expectations

Although LULU’s top line grew by 13.6% YoY, it failed to meet analyst expectations by $0.97 million, due to weaker-than-expected comps. The company’s EPS were in line with the consensus estimate of $0.38.

LULU traded at an average of ~42 times its current earnings in August. In comparison, peers Nike (NKE), VF (VFC), and Gap (GPS) traded at averages of 26.4x, 21.5x, and 12x. Since the company is trading at a premium to peers, expectations from the company are much higher. A slight fall could result in the stock sliding. Read more on the company’s valuations and peer trading comps in part seven of this series.

Can LULU sustain its comp growth?

Total comps, including direct-to-customer, increased 4% during the quarter, compared with the analyst expectation of a 5.8% growth. On a constant-currency basis, comps stood at 5%, down from the 8% reported in the previous quarter and 11% in the same quarter of last year.

Lulu reportedly faced traffic headwinds in 2Q16 and is expecting weak traffic through the second half of the year. It is now expecting mid-single-digit sales comps on a constant-dollar basis. This has raised concerns about the company’s ability to continue on its growth trajectory, which resulted in the sell-off following the release of its results.

To learn about the company’s year-to-date stock market performance, read the next part of this series. ETF investors seeking to add exposure to LULU could consider the iShares Morningstar Mid-Cap Growth ETF (JKH), which invests 0.51% of its portfolio in LULU.

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