Lululemon And The Question Of How Much Faith Can Be Put Into Guidance

For years, guidance has been used as a way for analysts to determine how to properly value a stock. Specifically, for Lululemon Athletica inc. LULU, over the past two quarters, management has been advising investors in two distinct directions.

What Happened In Q4?

On March 29, lululemon CEO Laurent Potdevin lowered the company's guidance, saying lululemon was off to a “slow start.” He said he expected revenue to be $70 million lower than Wall Street estimates and EPS estimates to be nearly $0.30 lower.

Overall, the new guidance seemed to turn investors away; it was obvious that management was not very upbeat about lululemon’s future outlook for fiscal year 2017. It ended up scaring away investors and sent the stock falling from $66.30 to $50.76.

An Entirely New Story

Meanwhile, despite these remarks, after a strong Q1 earnings report during Thursday’s after-hours session, the stock soared to $56.85, up 16 percent.

Market technician and Benzinga newsman Joel Elconin, said, “The catalyst for the rally is a first-quarter EPS beat of $0.04 along with a sales beat of $6.4 million. Also, the company raised its FY 2017 EPS outlook but cut its sales outlook.”

While the stock is still down nearly 18 percent since the Q4 earnings date, the question remains as to how a company can flip the switch so quickly. Was a switch even flipped? Why has the stock not even come close to reaching the $66.30 mark again?

It is notable that while lululemon did beat on most of its earnings metrics, management is still expecting revenue to be near their lowered Q4 guidance expectation. Is this what is holding the stock back?

Does Lululemon Not Have A Handle On Its Shelves?

Overall, after management was recently not optimistic about the brand’s future, suddenly, everything is going better.

China stores and online sales are now outperforming across nearly all sales metrics, and its markdown picture is now very healthy according to Potdevin. Additionally, the report highlights that stores are seeing a higher amount of traffic, a problem that was cited in its Q4 earnings call. Further, the brand is planning to open as many 50 new stores and hopes to see gross margins to increase.

Lululemon has regained its confidence in just three short months. But, have investors?

At time of publication, shares of lululemon were up 12.68 percent at $54.84.