Yoga apparel company Lululemon Athletica (LULU) reported second-quarter financial results Thursday. If you were just looking at LULU stock performance for an indication, you’d think Lululemon was doing some amazing things — Lululemon shares jumped 16% as investors reacted jubilantly to sales and profits that both beat expectations, as well as an improved full-year forecast.
But there are several reasons why yesterday’s Lululemon results are misleading, and why you should be wary of LULU stock.
The first is a fundamental tenet of retail: Same-store sales growth is absolutely vital to understanding a retailer’s growth prospects. Same-store sales, comparable-store sales or just “comps” provide an apples-to-apples comparison by measuring the growth of sales at stores that have been open for longer than a year.
In the traditional brick-and-mortar retail model, it makes sense why investors care: If a retailer is expanding and adding new locations, you want to know whether revenues are increasing simply because there are more locations, or if the company is finding ways to grow organically within its current locations.
You can only open so many new stores, after all, so comps have to shine for long-term growth.
LULU comps did not shine in the second quarter. Same-store sales were down 5% from the same quarter last year.
Moreover, while revenues did grow by 13%, and while earnings did beat estimates despite declining 14%, this comes three months after Lululemon cut its guidance back in June, setting a pretty low bar for this quarter and sending LULU stock to a three-year low. LULU stock was off 35% so far this year, so Thursday’s rally smelled more like relief, not belief.
And while LULU stock isn’t an absolute lemon in my eyes, I think one of its long-term risks is its somewhat faddish nature.
Fads come and go, and when they go, they tend to go rather quickly. Crocs (CROX), the funky footwear manufacturer, is an extreme case. CROX stock has plunged more than 50% in the past three years as the market’s strange obsession with the colorful, hole-filled products claiming to be shoes waned.
In my opinion, the widespread love for all things yoga is a bit faddish. (Though to its credit, yoga has been around for millennia. Porous neon footwear, on the other hand, took some time to appear for a reason.)
I worry, though. I worry that LULU isn’t diversified enough. I worry that the buzz surrounding Lululemon products has peaked, and I worry about those declining same-store sales. It’s somewhat of a stretch to compare Lululemon to competitors like Under Armour (UA) and Nike (NKE), which dwarf LULU in size and scale. Those are the companies LULU should emulate, though; UA started with athletic shirts, NKE with shoes, but both expanded to other product lines (including yoga wear).
LULU has tried to differentiate — it does offer more than just yoga pants — but its image is still too yoga-focused to justify a long-term investment. And I’m not sure it can ever sway the male population to buy in.
Ignore the LULU stock pop. And if you must own it, at least wait until same-store sales swing back around.
As of this writing, John Divine did not hold a position in any of the aforementioned securities.
