Lululemon (LULU) could once do no wrong. LULU stock became a darling among momentum traders, cruising from less than $3 a share in early 2009 to just under $80 a share in early 2012.
Since then, however, Lululemon stock has cooled off. In fact, LULU is actually sitting around 3% in the red since the start of 2013.
Lululemon stock recently was pounded by the company’s sheer-pants mishap and CEO departure, but the road ahead remains anything but clear.
That’s because competition for Lululemon is heating up, with two rivals for LULU gaining some steam.
Trouble for Lululemon?
The fact that Lululemon — a leader in the yoga apparel trend — is facing increased competition is hardly news. Gap (GPS) was the first competitor to knock on the door of LULU with the debut of its Athleta line, which features everything from yoga pants to bike shorts to regular gym gear.
On top of that, do-it-all retailers like Target (TGT) and Walmart (WMT) also offer their fair share of stretchy pants — and at far lower prices (and yes, lower quality) than Lululemon.
Well, now, JPMorgan analysts just announced that department stores have been “increasing allocation to activewear space,” with Macy’s (M) in particular planning to “double its activewear square footage by the end of October” and both Nordstrom (JWN) and Kohl’s (KSS) following a similar trend.
Citing that activity, JPMorgan upgraded Under Armour (UA) and raised its price target on Nike (NKE) — lead offerings in such department stores. JPMorgan also added that even Dick’s Sporting Goods (DKS) has been featuring the two brands more prominently, while they are also relevant for retailers such as Foot Locker (FL) and Finish Line (FINL).
That’s a scary trend for a specialty store like Lululemon.
LULU is facing competition from every corner and is struggling to keep up its once-rocketing growth, yet also runs the risk of diluting its brand if it tries to expands too much.
Sure, analysts did note that the overall pie for athletic wear is growing — especially in the women’s market. In theory, then, Lululemon could post growth by simply holding onto its market share (and its distinguished brand).
The issue, though, is whether that growth will be enough to please Lululemon stock investors. LULU is currently trading for nearly 30 times projected 2014 earnings — earnings that could easily slide even more, considering estimates have been on a downward trend. And that’s a big premium considering profits are only slated for 19% growth long-term, including a mere 6% improvement for LULU this year thanks to the aforementioned sheer-pant mishap.
Bottom line: While everyone loves to point to Lululemon’s loyal and luxurious customer base, LULU still has to figure out how to grow its pool of overpriced-yoga-pant lovers — especially with competition heating up fast.
Related Reading on Lululemon Stock
- A technical look at LULU stock. (InvestorPlace)
- Lululemon VP dumps shares. (InvestorPlace)
- An in-depth look at the company’s struggles. (Fortune)
As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.