It’s been a wild ride for holders of Lululemon Athletica inc. (NASDAQ:LULU). Yet the latest earnings report — which came out in early December — showed some positive signs. As a result, Lululemon stock has gained about 21%.
During the quarter, the revenues for LULU jumped by 13% to $544.4 million and the earnings came to $68.3 million, or 50 cents a share, up from $53.2 million, or 32 cents a share in the same period a year ago.
The Street, however, was looking for the top line to hit $540 million and earnings of 43 cents a share. What’s more, the company announced a new $100 million buyback plan for Lululemon stock.
As for the next quarterly report, it should be solid as well. Unlike many other retailers, it looks like LULU had a strong holiday season. Well, regardless of some of the recent strength, I still think there are serious risk factors. Let’s take a look:
Lululemon Stock Warning Signs: Politics
The Trump Administration’s plan to lower corporate taxes should provide a boost for LULU stock. But this could be more than offset by a border-adjustment tax. Essentially, this is meant to help avoid a spike in the budget deficit. Now the details of the border-adjustment tax are still very sketchy. But even a small one could have an adverse impact on LULU stock. The reason is that a substantial amount of the company’s production comes from overseas.
It’s true that LULU has options to deal with a border-adjustment tax, but they are far from ideal. For example, the company can raise prices, which could be tough since they are already at premium levels, or LULU may bring back production to the U.S. — a time-consuming and expensive proposition.
Interestingly enough, analysts at Citigroup Inc (NYSE:C) have crunched the numbers on the potential impact. The conclusion: LULU earnings may be 37% lower.
Lululemon Stock Warning Signs: Valuation
Lululemon stock currently trades at about 31 times earnings. In other words, Wall Street is fairly optimistic that the growth ramp can continue for some time. Yet the valuation is still at a hefty premium compared to many other fashion retailers. Just take a look:
| Company | Multiple |
| Gap Inc (NYSE:GPS) | 14X |
| Express, Inc. (NYSE:EXPR) | 9X |
| Urban Outfitters, Inc. (NASDAQ:URBN) | 13X |
| Zumiez Inc. (NASDAQ:ZUMZ) | 25X |
All in all, LULU stock has little margin for error right now.
Lululemon Stock Warning Signs: Competition and Consumer Trends
The competitive environment for the athleisure is certainly intense. Just some of the rivals include Under Armour Inc (NYSE:UAA), Nordstrom, Inc. (NYSE:JWN) and Nike Inc (NYSE:NKE). There are also well-funded startups like Fabletics, backed by actress Kate Hudson. Oh, and it looks like even Amazon.com, Inc. (NASDAQ:AMZN) is making a play for the market!
Although, competition is not the only problem that could weigh sales for Lululemon. Perhaps the biggest factor is the change in consumer tastes. And yes, this may already be happening, as seen with the renewed interest in jeans.
Canaccord analyst Camilo Lyon noted after the latest earnings report for LULU that, “we did not see anything that would alter our thesis, particularly as we expect the denim trend to materialize in a greater way next year.” In fact, the Canaccord price target on LULU stock is at $47, which compares to the current market value of $66. Avoid Lululemon stock until these issues and the risks presented make themselves more known.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is the author of various books, including Taxes 2017: Saving A Bundle. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
