Lululemon Athletica Inc. (LULU) Stock Is in Trouble for 2 BIG Reasons

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With just a quick, cursory look at the past and projected numbers, Lululemon Athletica Inc. (NASDAQ:LULU) looks like it’s doing great, and subsequently, LULU stock looks like it’s a great growth stock to own.

LULU Stock: Lululemon Athletica Inc. (LULU) Stock Is in Trouble

As they say though, there’s more to the story.

Granted, the “more to the story” that’s apt to provide a troubling headwind for LULU is difficult to grasp, since it’s more of a subjective problem than a quantifiable one. The red flags are there, however, and some observers are starting to take notice. Now, the dots just need to be connected.

This is the connecting of those dots.

Problem No. 1: Brick-and-Mortar Retailing Is Struggling

Despite a bevy of PR problems over the course of the past couple of years, the Lululemon earnings growth train has yet to be derailed. Earnings are on pace to grow from $1.86 per share last year to $2.13 per share this year to $2.51 per share of LULU stock next year. Sales have grown accordingly, even if same-store sales are starting to sour.

A great deal of the company’s double-digit revenue growth is attributed to (according to the company) the relationships its store employees build with customers. Makes sense. Yoga and fitness are a personal thing, and fit/comfort matters.

And yet, the people-oriented model is ultimately a vulnerable one, for two key reasons. One is, consumers are increasingly shopping online — even for fitness apparel — as they become more comfortable with self-service. The other is, in-store employees [and this isn’t just a Lululemon thing] increasingly lack basic customer service skills. Some outright lack people skills.

The second is admittedly a contentious claim, but the horror stories for Lululemon alone are starting to stack up, like here, here and several here. It’s reasonably safe to say more and more store employees “just don’t get it,” which is a problem since relationships are key to its growth.

Even if its sales people were fully plugged in though, it wouldn’t matter much. See, according to a recent UPS survey, 2016 is the year e-commerce surpassed brick and mortar as the preferred means of buying goods. Lululemon has on online presence, but it doesn’t have an edge on the competition in the digital world.

Problem No. 2: The Athleisure Cycle Has Run Its Course

Perhaps even more alarming to current and would-be owners of LULU stock than the waning benefit of Lululemon’s brick-and-mortar presence is something Jefferies analysts Randal Konik and Janine Stichter said as they downgraded LULU from a “buy” to a “hold” in September:

“While we believe LULU still has ample [opportunity] to grow its top-line and expand op margins, we believe this is now largely factored into the stock. On top of this, we believe the athleisure trend is now starting to peak.”

That’s a premise that was floated earlier in the year too, and supported by some sound evidence. Namely, during the first quarter of 2016, the amount of dollars spent on activewear went negative on a year-over-year basis for the first time in years.

At the same time, whether or not athleisure has peaked, or will continue to grow, or is poised for an outright implosion, more affordable competitors have surfaced from every direction. Gap Inc (NYSE:GPS), Under Armour Inc (NYSE:UA) and even L Brands Inc (NYSE:LB) division Victoria’s Secret (and more) have gotten into the yoga/activewear game, taking aim at a piece of the market Lululemon largely defined on its own.

Bolstering the turbulence, Lululemon is about to run into an even more philosophical idea … the company may have become too popular for its own good.

It sounds odd on the surface, but after some careful thought, it doesn’t seem outrageous to recognize that one of the most compelling aspects of the Lululemon line of clothing is — or was — that not everyone owned it. For some it was out of reach, price-wise, positioning the name as an aspirational brand. As is almost always the case though, sooner or later, the majority of the market gets to meet their aspirations; lower prices helped make it happen.

Robin Lewis explained it of Michael Kors Holdings Ltd (NYSE:KORS) clearly back in 2014:

“The seductive thing about the Kors-type of “hot” trajectory is in the initial delight of consumers as the brand becomes to stand for everything for everybody, everywhere. I mean everyone can own a Michael Kors-something. And everyone can even have the “it” bag during this of-the-moment serendipitous cultural zeitgeist – for the moment. Or should I say for about a nano-minute. Because all of a sudden, in a nano-split second, the largely young and trend-fickle consumer base wakes up and realizes the brand is slapped on everything and is being worn by everybody, everywhere. And, crash! Wonderful becomes awful. The brand stands for nothing for anybody — everywhere.”

It rings oddly familiar to those who’ve followed the Lululemon story for a while.

KORS shares are down more than 50% from their early 2014 peak.

Looking Ahead for LULU Stock

The Lululemon earnings figures for its third fiscal quarter of 2016 will be released on Dec. 7, with a conference call scheduled for 4:30 pm EST that day. As of the latest look, analysts expect the company to report a profit of 43 cents per share on revenue of $540.7 million. Both compare favorably to the 35 cents per share of LULU stock Lululemon earned in the same quarter a year earlier, when it drove $479.7 million worth of revenue.

It needs a strong showing with the report. And, it will probably get it.

Even more than a solid Q3 beat though, Lululemon needs to convince LULU investors it has got a grip on the cyclical and secular changes its target market is going through right now. If it fails to do that, any knee-jerk bullish response could be short-lived. With LULU stock priced at a frothy trailing price-to-earnings ratio of 29, there’s not a lot of margin for error.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/12/lululemon-athletica-inc-lulu-stock-trouble/.

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