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Individual investors tend to buy what they understand, and what’s easier to understand than a company that makes workout clothing that’s fashionable enough to wear even when you’re not doing yoga?
That could be the reason for the extreme popularity of Lululemon Athletica Inc. (NASDAQ: LULU), whose shares have risen more than 50% in the past year alone and added another 10% after a strong but not stellar first-quarter earnings release on Tuesday.
The Vancouver, British Columbia company in recent years has built a strong and loyal customer base, in spite of a few stumbles including a line of inadvertently see-through yoga pants. On Tuesday it reported that first-quarter sales rose 10% to $423.5 million from $384.6 million in the year-earlier quarter. It beat the consensus analyst estimate for revenues of $418.9 million. Direct-to-consumer sales shot up 27% to $83.6 million.
It’s a brisk pace of growth that’s undoubtedly a positive, but the company’s earnings release also raised some other concerns. Its “comparable store sales,” a figure that includes both brick-and-mortar and direct-to-consumer sales, increased by a lesser 6%, while same-store sales (comprising stores that were open both this year and last year) fell 1%.
As for the fast-growing direct-to-consumer segment, it still accounts for less than a fifth of the company’s total revenues.
Lululemon’s operating income also took a hit in the first quarter, falling 3% to $68 million.
Questions on Growth Pace
Put it all together and you get a picture of a business with a popular product, but also a slowing pace of growth in its primary channel of brick-and-mortar retail.
You don’t have to look too closely at the Lululemon business model to raise questions about its long-term future. Can a relatively narrow line of cute but pricey workout apparel sustain the company? What’s the competitive landscape? What are the opportunities for expansion?
Lululemon is now working on expanding its line of men’s athletic apparel, but there is no guarantee that the same pricey-but-pretty model will work with men, who tend to care less than women about how they look when working out or hanging out. And speaking of women, will Lululemon even be able to expand its base of female customers?
The Stock is Spendy
There’s one other very important question, and it has to do with Lululemon’s price-earnings ratio, which currently sits at a rather stratospheric 41.1. That suggests a future of nearly hockey stick growth is in store. While it’s a little unclear which businesses in the gray area between athletic clothes and fashion are Lululemon’s main rivals, you can look at a broad spectrum of potential rivals without finding any with such high valuations.
The Gap (NYSE: GPS), whose Athleta subsidiary may be the closest thing Lululemon has to a direct rival, has a P/E ratio of 13.1. Nike (NYSE: NKE) comes in around 29. If you want to judge Lululemon as more of a fashion company, you could even compare it to Ralph Lauren (NYSE: RL), whose shares trade at a P/E of 17.3.
So, its good enough first quarter notwithstanding, Lululemon stock is looking more than a little pricey right now.
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