Can Lululemon Keep Up the Momentum?

With shares of Lululemon Athletica Inc. (NASDAQ:LULU) trading at around $76.88, is LULU an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Lululemon might be one of the most hated success stories in existence. To many investors, it’s a fad that will eventually fade away. While that’s not likely, there are potential dangers ahead, especially considering the company’s premium pricing strategy.

While Lululemon has been hot for years, what happens when the economy sours? Okay, the economy has already soured. Therefore, the question should be rephrased: what happens when the stock market comes back down to reality? That answer is twofold. Once, it’s an expensive growth stock and investors will want no part of it. Two, since Lululemon attracts a mostly affluent crowd, some of these shoppers will lose household income through investments. In all, a vicious cycle might present itself.

However, Luluemon does have a lot of momentum, and it’s not ordinary momentum. Lululemon has more than just customers. It has created a family-like atmosphere for its customers. This has been accomplished through superb customer service and unique events. For example, customers can contact a local store to set up a Yoga Rave. The following is an example. Even if you don’t like Lululemon and/or the stock, you might enjoy the video if you appreciate an energy boost. Or, since it’s Friday, perhaps it can get your blood flowing for the weekend:

Sticking with the positive angle for now, Lululemon is confident in its future potential, considering its adding more locations. Analysts also tend to favor the Buy side: 11 Buy, 11 Hold, 3 Sell. Other positives for Lululemon include improved productivity, focused merchandising, consistent improvements in revenue on an annual basis, consistent improvements in earnings on an annual basis, strong margins, and an impressive recovery from its “pants crisis”.

Now let’s take a look at some numbers. The chart below compares fundamentals for Lululemon, Under Armour (NYSE:UA), and The Gap (NYSE:GAP).  Lululemon has a market cap of $10.96 billion, Under Armour has a market cap of $5.95 billion, and The Gap has a market cap of $17.62 billion.

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LULU

UA

GPS

Trailing   P/E

41.03

49.89

16.28

Forward   P/E

29.65

30.83

12.92

Profit   Margin

19.74%

6.34%

7.25%

ROE

36.35%

16.07%

40.18%

Operating   Cash Flow

$280.11 Million

 $198.27 Million

  $1.94   Billion

Dividend   Yield

N/A

N/A

1.60%

Short   Position

37.00%

18.80%

3.00%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Strong  

The debt-to-equity ratio for Lululemon is stronger than the industry average of 0.50.

Debt-To-Equity

Cash

Long-Term Debt

LULU

0.00

$590.18 Million

$0

UA

0.07

$255.72 Million

$60.44 Million

GPS

0.43

$1.51 Billion

$1.25 Billion

 

T = Technicals Are Strong   

Lululemon has been one of the top performers throughout the broader market over a three-year time frame. That’s saying a lot!

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1 Month

Year-To-Date

1 Year

3 Year

LULU

23.36%

0.85%

1.09%

308.70%

UA

12.60%

17.31%

15.82%

237.40%

GPS

8.37%

22.89%

35.81%

63.65%

 

At $76.88, Lululemon is trading above all its averages.

50-Day   SMA

68.05

100-Day   SMA

69.56

200-Day   SMA

68.58

 

E = Earnings Have Been Strong               

Once again, earnings and revenue have consistently improved on an annual basis. When it comes to numbers, it’s difficult to find negatives for Lululemon.

2008

2009

2010

2011

2012

Revenue   ($)in   millions

353.49

452.90

711.70

1.00B

1.37B

Diluted   EPS ($)

0.28

0.41

0.85

1.27

1.85

 

When we look at the previous quarter on a year-over-year basis, we see an increase in revenue and earnings. Revenue and earnings have also increased on a sequential basis.

1/2012

4/2012

7/2012

10/2012

1/2013

Revenue   ($)in   millions

371.52

285.70

282.63

316.54

485.49

Diluted   EPS ($)

0.51

0.32

0.39

0.39

0.75

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

At the moment, Lululemon is enjoying the dedication of an extremely loyal customer base. However, there are some things that are out of the company’s control. Is it possible that the stock market continues to trade higher? Yes. Perhaps this bull run can last a lot longer. Nobody knows. At the same time, anyone with a pulse and a brain knows that there’s something ominous on the horizon. It might be a distant horizon, but it’s there. We could look at the standard reasons, such as increased taxes, underemployment, and eventual deleveraging on an unfathomable scale, but it should also be noted that U.S. company profits relative to GDP are the highest they’ve been since 1945. Could there really be a lot more room to run? This is potentially bad news for Lululemon and the industry.

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Conclusion

Lululemon wouldn’t withstand a steep market correction well. Premium pricing is the primary reason for this. If the consumer weakens, then customers will look for cheaper alternatives, regardless of how loyal they have been in the past. Other headwinds include increased competition, a narrow niche (unless the strategy changes), poor stock valuation, and a spike in the short position (rarely a good sign despite the potential for a short squeeze). On the other hand, Lululemon is now an established brand, which opens a lot of doors in the future.

With all factors taken into consideration, Lululemon is a WAIT AND SEE.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I do not have a position in this stock. I am currently short technology, financials, the Russell 2000, and the euro.

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