Should Investors Ride the Lululemon Wave?

Lululemon Athletica (NASDAQ: LULU) jumped 12 percent in April. All in all, the company’s stock has increased by more than 80 percent in 2018 alone. To say this is a meteoric rise would be an understatement. There is much debate as to whether the price increase is warranted.

The apparel maker’s recent upswing is attributable to investor optimism pertaining to the company’s steadily improving performance. Lululemon sales are up two percent at brick-and-mortar locations. This bump might not be meaningful in the long run, yet the fact that the company’s online business has surged in recent months is reason enough to consider a stake in Lululemon.

Shoppers are more than willing to pay a premium for Lululemon apparel, partially because the company’s garments are en vogue. Women around the world are clamoring for Lululemon gear. The spike in popularity has propelled a gross margin increase by two percentage points in March alone.

It is clear the masses are eager for Lululemon’s offerings yet those who have yet ride this wave wonder if now is the optimal time to invest. The company is searching for a new CEO after Laurent Potdevin resigned. Those who follow Lululemon are well aware of the fact that it might not matter who runs the company. It seems as though the hype surrounding Lululemon apparel does the selling, regardless of leadership’s actions. Company executives anticipate sales increases in the high single digits across the remainder of 2018. Earnings per share will likely increase to $3 or more compared to $2.59 from the year prior.

Industry analysts have a rosy outlook for Lululemon. Earnings are forecasted to grow by more than 60 percent across the next year. However, market analysts anticipate an earnings plateau as the popular clothing maker heads into the 2020s. What seems to matter most is the rate at which Lululemon’s earnings are increasing as time progresses. Prudent investors will ignore short-term fluctuations to square their focus on the long run. Analysts unanimously agree Lululemon earnings will increase by 15 percent in each of the years to come.

If you have owned Lululemon for several months or longer, you have made quite the tidy profit. There is no shame in cashing out some of your stake and closely monitoring the stock in anticipation of a possible downswing. After all, Lululemon is up more than 26 percent after its impressive earnings report in late March. Yet, investors should be concerned the stock has increased to much too quickly, and will eventually become a victim of profit taking.

Do not be swayed by Lululemon’s better-than-expected earnings per share and revenues. The company did not blow the Street’s expectations out of the water. Revenues came in at $929 million, compared to the expected $912 million. Earnings per share were expected to be $1.27 and turned out to be $1.33. These are some fantastic numbers, but savvy investors agree the figures do not warrant the type of stratospheric leap Lululemon’s stock has made in recent months. Consider the fact that the company’s P/E ratio is a whopping 52.2. Furthermore, Lululemon stock is trading at more than double the multiple of the highly-respected S&P 500.

Lululemon will likely move back down to a more reasonable price and P/E ratio in due time. There is no doubt this stock is overvalued at its current price.

Do not lose sight of the fact that Lululemon primarily sells clothing to women and girls. Female fashion taste tends to be rather fickle based on trends, seasonality, price points and other factors. If female trend-setters become even slightly dissatisfied with Lululemon offerings, revenue will likely decrease and company leaders will face an unenviable decision: pivoting to focus on a new target persona, or marching forward with women’s apparel that might not prove chic for much longer.

Even if you are a Lululemon fanatic, there is no guarantee the masses will share your fancy in the months and years to come. Wait for Lululemon to dip before investing your hard-earned money.

Regards,

Ethan Warrick
Editor
Wealth Authority