Lululemon (LULU) has been quite the rollercoaster so far this year, and any investors still on board likely felt their stomachs drop again this morning. Thanks to rough-and-tumble pre-market Thursday trading, LULU stock opened around 9% lower.
This morning’s Lululemon earnings report was to blame, although it was the company’s outlook rather than its recent results that had LULU stock holders letting go.
And unfortunately for any LULU stock investors still holding on, more ups and downs are more than likely in the coming months.
Lululemon Stock – Where’s the Growth?
Heading into the Lululemon earnings report, InvestorPlace expert Will Ashworth predicted that Lululemon stock could tumble 10% if it missed earnings expectations.
He pretty much nailed it.
The good news for LULU stock fans was that Lululemon earnings for the third quarter were actually solid. The company reported an EPS of 45 cents, topping the expectations of both Lululemon stock analysts and its own management. And 20% sales growth translated to a top-line beat too.
But Lululemon earnings estimates for the current quarter were unimpressive — and LULU stock sank as much as double-digits in pre-market trading, just as Ashworth predicted.
In the crucial fourth quarter, which includes the holiday shopping season and thus usually brings in around 35% of the company’s sales, LULU says it will likely earn between 78 and 80 cents per share on revenue of $535 million to $540 million. Same-store sales are also expected to be flat in the fourth quarter — a giant red flag considering the metric used to be in the double-digits and that Lululemon stock continues to trade for a hefty growth premium.
That news disappointed Lululemon stock analysts, who had expected earnings of 84 cents per share on sales of $571 million, and sent LULU stock investors for the door.
Just Another Problem for the Pile
Factoring in this morning’s losses for Lululemon stock, shares have lost nearly 20% since Jan. 1. That’s because an unimpressive outlook is just the most recent worry. A few others:
- Increasing competition from names like Nike (NKE), Under Armour (UA), Target (TGT), Walmart (WMT) and … you get the point
- The infamous sheer yoga pants recall, which sliced off between $57 million and $67 million in sales, and a quarter of the stock’s value in the days after
- Controversy with founder Chip Wilson, who has since stepped down
- Leadership uncertainty, as CEO Christine Day stepped down in the summer and Lululemon stock investors went months without news of a replacement
- And a shareholder lawsuit in the wake of the sheer yoga pants and CEO circus
Lululemon did name a new CEO earlier this week. Laurent Potdevin, who has time at Toms Shoes, Burton Snowboards and LVMH on his resume, will take over January 2014. But Potdevin will face an uphill road to keep Lululemon yoga pants away from controversy, keep the retailer growing and get Lululemon stock back in investors’ good graces.
Lululemon Stock Still Expensive
Arguably the worst news for Lululemon stock investors, though, is the fact that shares of LULU still look overpriced even after today’s sell-off. Lululemon stock was hot in recent years as yoga pants and profits exploded to the tune of 54% annual growth.
Since then, things have slowed down, meaning this year’s selloff is likely just the beginning of that painful transition. Unless Potdevin can somehow jumpstart growth immediately, there’s a good chance Lululemon will keep falling, just as Apple (AAPL) got battered while investors came to terms with cooling growth.
Don’t be fooled by the 27% growth on tap for earnings next year, either. That metric, in a bubble, makes LULU stock look reasonable after today’s sell-off, as shares are now going for just 25 times expected 2014 earnings.
But that high growth rate is thanks to the fact that growth was so non-existent this year, at a mere 6% improvement. And averaging it out, analysts expect just 19% earnings growth over the next five years — not too shabby, but not good enough for the levels Lululemon stock is currently sitting at.
All in all, Lululemon stock has an uphill struggle to get back to its former growth and glory days. Don’t hop on this rollercoaster until you see some sure signs that things will get better at all — or unless the transition away from being a growth stock actually turns LULU stock into a bargain.
As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.