LULU Stock: Sell This Downward Dog After Earnings Sprain

Time to roll up your mats and head for the door

Shares of the yoga and athletic wear retailer Lululemon (LULU) were having a fine year on Wall Street, with LULU stock up nearly 15% year-to-date … before today’s massive selloff, that is.

Lululemon logo LULUWell, it was good while it lasted. LULU stock is cratering this morning, down about 12% after its second-quarter earnings face-plant. Those YTD gains are now sitting barely above a measly percent. Yikes.

The Vancouver-based apparel company actually managed to beat consensus earnings per share and revenue estimates, but it was Lulu’s lackluster guidance that turned investors off.

While Lululemon’s financials are by no means disastrous, LULU stock is still more blatantly overvalued than ever. For the time being, no amount of locust poses can fix this downward dog.

LULU Earnings by the Number

Counterintuitively, Lululemon earnings were actually pretty decent in the second quarter, which ended Aug. 2.

Earnings came in at 34 cents per share, up a penny from both the same period last year and consensus forecasts. Revenue jumped 16% to $453 million, clocking in nearly $8 million above the $445.8 million consensus.

But what ruined the day for LULU stock (and what augured poorly for investors going forward), was management’s soft earnings guidance.

Lululemon expects EPS between 35 cents and 37 cents per share, well beneath the 43 cents per share Wall Street analysts were looking for.

Full-year earnings guidance was also below consensus; Lulu’s range of $1.87 to $1.92 per share didn’t quite match the $1.93 per share analysts expected LULU stock to haul in.

“So Lululemon was a few cents below earnings guidance here and there … what’s the big deal?”

Glad you asked. It’s a big deal because LULU stock is somewhat of a growth play — or at least it’s being valued like one. Before today’s nasty tumble, shares traded at 34 times earnings and 27 times forward earnings. For some sense of how that compares to the broader market, consider that the S&P 500 trades at a price-to-earnings of 20.4 and a forward P/E of 16.6.

Not paying a dividend and lowering earnings expectations in a choppy market? It’s no wonder LULU stock is getting hammered.

Lululemon also bought back 1 million of its own shares at an average price of roughly $64 last quarter, so it’s feeling the pain doubly today.

Bottom Line on LULU Stock

Looking elsewhere in the industry, LULU will continue to face pressure from big-timers with far more resources, namely Nike (NKE) and Under Armour (UA). Both companies have increasingly turned their attention towards the female consumer, and Nike even opened up its first women’s store late last year in Newport Beach, California.

In fact, if you want to have exposure to the world of athletic retail but aren’t crazy about LULU stock after its rough forward guidance, NKE is a better play for a market like this. Nike is a veritable cash cow, growing earnings and revenue reliably year-after-year, and it even pays a modest 1% dividend.

It’s time for Lululemon stock to come back down to earth, and if shares hover around the $55 level for too long, some market technicians think that could spell the beginning of another steep drop.

Don’t stick around to test the theory.

As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/09/lulu-stock-lululemon-ua-nke/.

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