If you have yet to hear about Lululemon athletic wear, you are probably not keeping up with the latest trends all that well. This is a business that has been around for a number of years now, but they have really taken off in the last five years or so. They make high performance athletic wear and in particular clothing for yoga. It is a growing business, but at this point it may have seen some of its best years already come and go.
Worries About Stock Valuation
The problem for Lululemon is largely in the valuation of its stock. Different stocks receive different valuations based on what investors feel is appropriate for any given situation. It is pretty obvious that many investors feel that Lululemon has been deserving of a larger than average valuation because of its exceptional growth over the years. Indeed, in the last twelve months the company has grown at a rate of 15.6%. That is impressive, but not nearly enough to justify the valuation currently placed on this stock.
The Bearish Case
Now for the bearish case on this stock. Some of the problems start with the fact that the earnings per share are expected to only reach $2.54 per share while the last quoted price at the time of this writing is $64.22 per share. That is a price to earnings multiple of roughly 25 for next year’s earning. For the next five years the company is expected to grow at a rate of about 16% per year. If it were to accomplish this, then one might be justified in paying a multiple this high, but it does not appear as though the multiple should expand much beyond this. The risk to reward ratio is too high in favor of risk.
The Low Oil Price Party Is Coming To An End
Consumers have recently benefited from lower than usual oil prices. It has meant less money going into the tanks of customer’s cars, and more money in the cash registers of all kinds of retails. This of course has been a boon for places like Lululemon, but that party may be coming to a close soon. Oil prices have seemingly finally found their bottom, and they have had a healthy rebound in the last month. So far, prices remain low enough that consumers are still pleased with it, but they are starting to creep up slowly. If this continues, that could cause price sensitive customers to flee from their favorite stores.
Expensive Garments May Be The First To Go
Speaking of pricing, Lululemon is known for its higher end prices and materials. They compete with the likes of Under Armour and Nike, but often have much higher prices than either of those two stores. It is a reality that is hitting the customers of Lululemon like a ton of bricks. They understand what they are paying for, but many of them may decide that it is not worth it anymore given the ever rising costs of the bare essentials of life.
Some of these consumer factors may already be making their way into the business that Lululemon is doing. They had an earnings miss in the third quarter of 2015, a rare event for this company. If they start to drop the ball on what they are able to earn for too long the multiple afforded to this stock could quickly disappear as well.
The Ever Trendy Fashion Industry
A final consideration to make about this stock is just how picky the fashion market is. While Lululemon has been king of the hill for some time now, their reign may be quickly coming to a lose. The reality is that there are a lot of competitors pushing into their market, and the whole athletic wear trend may be losing steam on its own anyway. With this in mind, Lululemon is certainly not a stock to run out and purchase shares of.
This article is meant for educational purposes only. Always consult a financial expert before making any investment decisions. Trade at your own risk. Investments are not guaranteed and may lose value.