Why Lululemon Athletica Inc. (LULU) Shouldn’t Buy Under Armour Inc (UAA)

“Athleisure” company Lululemon Athletica Inc. (NASDAQ:LULU) captured the market’s attention with a range of women’s athletic wear that they were crazy about. LULU stock delivered impressive returns until 2013 and since then, the firm hasn’t been able to move the needle anywhere besides down. Last year, Lululemon stock was able to make its way to a high of $80, but considering that’s still a few cents lower than LULU’s highs in 2013, the company’s progress is questionable.

Why Lululemon Athletica Inc. (LULU) Shouldn't Buy Under Armour Inc (UAA)

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Former CEO and Lululemon’s founder Chip Wilson has been outspoken about his disappointment with the firm’s new management.

Some of this is easily explained by the fact that he was essentially pushed out during a 2013 scandal, but he does have a point when he says LULU stock is unimpressive and hasn’t gone anywhere since he was at the helm in 2013.

The company is struggling against a difficult retail environment and quickly changing consumer preferences. On one hand, athleisure is a huge market at the moment, but many see this trend starting to dwindle as denim gains momentum and the population ages. The problem with LULU’s value proposition is that one of its main draws is the fact that it is stylish. However, if wearing athletic gear as day-to-day apparel falls out of favor, LULU could struggle.

Right now, customers are paying a premium in order to get fashion-forward clothing, but Lululemon might lose its foothold in athletic wear once athleisure has died out because its clothing won’t have the same appeal to athletes and gym-goers as brands like Nike Inc (NYSE:NKE) or Adidas AG (ADR) (OTCMKTS:ADDYY).

Lululemon Stock Is Expensive to Bet On

LULU stock could see brighter days ahead, but that’s not a bet I’d be willing to take. The company has added menswear to its line and it has started to incorporate casual, non-athletic clothing into its brand which could help the firm transition through a shift away from athleisure.

However, with a price-to-earnings ratio of 30.96, that’s a pretty expensive bet to make. Especially considering the firm’s financials don’t paint a promising picture. While Lululemon stock doesn’t have any debt, the company’s profit margins have been steadily declining over the last few years and without a catalyst to reignite consumer interest, the firm may find itself in choppy waters in the coming year.

LULU Stock and an Under Armour Acquisition

Wilson has been outspoken about many of LULU’s moves since his departure, but his latest complaint has been about the firm’s unwillingness to acquire competitor Under Armour Inc (NYSE:UAA, NYSE:UA). Wilson took out a full-size ad at the bus stop directly in front of the Lululemon headquarters urging the firm to buy UA while the company was “weak”.

While it’s unclear whether Wilson was simply antagonizing LULU’s management team or if he really believes that UA would be a good buy for LULU, that scenario is unlikely. Hopefully, Lululemon execs have been unfazed by Mr. Wilson’s advertisement because Lululemon stock certainly doesn’t have what it takes to support UA’s turnaround plans.

Under Armour needs cash, cash and more cash to build its brand. The firm has been able to chip away at its much larger, more well established peers, but the firm needs to expand its footwear line exponentially and take on some new athlete sponsors to help with marketing in order to make further progress. Those things are going to come at a steep price — one that LULU can’t afford.

Lululemon similarly needs to invest in its own business. The firm needs to continue updating its apparel in order to remain relevant and shift with the tides. LULU can’t be focusing on fixing someone else’s business before it repairs its own.

The Bottom Line on LULU

Chip Wilson is right when he says that LULU stock hasn’t moved much over the last two years, but his ramblings about a UA acquisition are both bizarre and unfounded. While I agree that Lululemon stock isn’t a great investment right now in the retail space, a UA purchase would make the company even more unappealing.

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

Article printed from InvestorPlace Media, https://investorplace.com/2017/03/lululemon-athletica-inc-lulu-shouldnt-buy-under-armour-inc-uaa/.

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