Why Investors Shouldn’t Bet on Lululemon Athletica Inc. Stock

Since mid-October, Lululemon Athletica inc. (NASDAQ:LULU) has pulled off an impressive rally. A key has been a standout earnings report, which saw a beat on the top and bottom lines. Yet it is still important to note that the year has still been fairly choppy, with the overall return for LULU stock at about 21%.

So what’s next? What should investors do with LULU stock? Well, I think the best approach is to be cautious. While the company has been able to get some of its momentum back, there are still some nagging issues.

Let’s first look at some of the pros on LULU stock. First of all, the company certainly has a powerful brand, which has been able to command premium pricing. Lululemon also has a loyal customer base.

As for the financials, they are solid. There is $650 million in the bank and no long-term debt. And here are some other metrics from the latest earnings report:

– Total comparable sales rose by 8%.

– The direct to consumer segment jumped by 26% (showing that the company is getting traction with its online efforts).

– Gross profit increased 16% to $322 million.

– Growth in Asia spiked by nearly 100%, with a 450%+ gain in China.

– The company reconfirmed its goal of achieving $4 billion in revenues by 2020.

So yes, things have been going quite well.

LULU Stock and Competitive Pressures

LULU has been able to manage the competitive threats. But this can only last so long. LULU has to fight tough rivals like Nike Inc (NYSE:NKE), adidas AG (ADR) (OTCMKTS:ADDYY), Gap Inc (NYSE:GPS) and Under Armour Inc (NYSE:UAA).

There are also scrappy startups that have access to large amounts of venture capital, like Kate Hudson’s Fabletics. Oh, and yes, there is buzz that the mighty Amazon.com, Inc. (NASDAQ:AMZN) will make a play for the market.

Actually, there are already signs that the competitive pressures are having an impact. For example, Canaccord analyst Camilo Lyon believes that the recent warehouse sales point to some ominous problems.

In a recent note, he stated: “This increase in frequency of warehouse sales could be in response to slowing brand momentum amidst rising competitive pressure and shifting fashion trends.”

Interestingly enough, his research indicates there is a growing trend toward denim, which is likely to weigh on the company. What’s more, his survey found that 18% of customers plan on buying fewer LULU pants in the coming year

Keep in mind that Lyon has a $45 price target on LULU stock.

Bottom Line on LULU Stock

If you take a look at the chart of LULU stock, it is kind of remarkable. For the most part, there has been a cap at about $80 per share, after which there is usually a notable drop. This has happened twice in 2012, twice in 2013, and once in 2016!

Then again, the fact is that Lululemon has a long history of inconsistent performance, such as with inventory issues. Let’s face it, this is common for any innovative brand.

Will things be different this time around? I would not bet on it. After all, the LULU stock price is already baking in much of the good fundamentals and then some. Note that the price to earnings multiple is at an expensive 39X, but the annualized growth rate for revenues is only about 13%. In other words, it would not be surprising to see yet another pullback.

Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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