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Lululemon Love Story About to Unravel

Gap's Athleta is poised to make a serious challenge

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The important thing to remember is most of Athleta’s revenue thus far is from e-commerce. It already has done the difficult part. Lululemon, on the other hand, has blown up its e-commerce model and is virtually starting from scratch. There’s no certainty its customers will be as loyal online as they’ve been off. In the end, e-commerce is going to make or break Lululemon.

Potential Upside

Ben Graham had a simple formula he used to determine if a stock is worth a look. He believed a good stock is one where the P/E and price-to-book value are no more than 15 and 1.5, respectively, and multiplied together, total no more than 22.5. Of course, he was a value investor, so Lululemon doesn’t really apply.

However, some bright people realized that if you multiplied 22.5 by earnings per share and book value per share, then calculated the square root of the total, you’d have a general idea about the potential upside. Using Lululemon’s trailing 12-month EPS of 94 cents and a book value of $3.60, I get a fair-value estimate of $8.72. That’s quite a bit lower than its current price of $46.

At this point, I can hear shareholders screaming in outrage, so let me do you a favor. I’ll double each of those numbers to $1.88 and $7.20. It’s still only $17.46, and let me be clear: The 2013 analyst estimate of $1.36 per share assumes there will be very little competition for the retail darling. That assumption is 100% wrong. If Gap messes up its golden opportunity, which is still very possible, Nike (NYSE:NKE) or Under Armour (NYSE:UA) are capable of taking up the gauntlet.

Bottom Line

With the likelihood of a double dip on both sides of the border very real, I’d sell now while you still have something to show for it.

Article printed from InvestorPlace Media,

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