Lululemon Athletica Inc. (NASDAQ:LULU) is a company women love that has become a battlefield for analysts.
Women do like the clothes, and are always ready to dish on where that started. But analysts either love it or hate it. They both seem to have good arguments on their side.
Lululemon, for those of you who believe no sport is worthwhile unless it includes some violence, is known for making yoga clothes. Its unique value proposition is that it controls its entire supply chain and only sells direct, allowing it to maximize margins on both the front end and the back end.
The company was founded in Vancouver by Chip Wilson who, since being forced out in a 2013 scandal, now makes a hobby out of criticizing the company, despite remaining its largest shareholder.
LULU Stock as a Down Dog
What’s not to like? Let our Tom Taulli list some things that make Lulu a down dog, which in yoga parlance is a pose where you have your hands on the ground but otherwise keep your weight on your legs. (This is harder than it sounds.)
Donald Trump’s tax policy could hit it with new taxes on its imported merchandise, he writes. The valuation of 31 times last year’s earnings is rich for his blood, in a world where Urban Outfitters, Inc. (NASDAQ:URBN) sells at 13x. He’s also concerned about a growing trend to wearing jeans instead of form-fitting activewear.
Deutsche Bank sees limited upside in Lululemon and the technicians are worried about something called a “downward triangle,” which is not a yoga pose but a chart pattern indicating a stock is headed lower.
So you’re guessing it’s time to walk away, mindfully, from this stock, maybe in favor of Nike Inc (NYSE:NKE), which sells at just 25 times earnings and offers a dividend as well.
Not so fast.
LULU Stock as an Up Dog
A backbend done from the ground, with your arms extended, is called an up dog. The consensus analyst rating for LULU stock today is a buy.
Vetr, RBC and William Blair are all pounding the table for the stock, raising their estimates for earnings and seeing improved margins ahead.
Kenra Investments has looked at the company and doesn’t see anything wrong. The company is focused on raising margins, both results for the January quarter and guidance going forward are positive, and it remains the unquestioned leader in its niche. Sales growth of 15% per year has been outstanding, and gross margins are near 50%. Price targets among bulls are as high as $80 per share.
My Own View on Lululemon
Lululemon exists at the intersection of sport and fashion, which is why it’s controversial.
The company is now well-managed under Laurent Potdevin, but tastes can always change on a dime, especially women’s tastes, and LULU stock depends on the trend toward fitness remaining intact.
As America ages, as the world ages, I can’t see more people going into the street wearing tight, form-fitting clothes that look a bit like underwear. Maybe that’s just me, but the bottom line is that Lululemon’s operating margins have been falling for years, with profit margins falling from about 20% in 2013 to the low teens last year.
The company has no debt, and it has about $300 million in positive operating cash flow each year. But the bull case is based mainly on management promises of improvement in what the company already does. Adding jackets and running outfits to the line, even some expensive men’s wear, doesn’t give me a warm fuzzy feeling. Lululemon is all about those warm, fuzzy feelings.
I’m going to pass on LULU stock, as a fully priced growth stock with iffy growth prospects, and risk the wrath of bulls if I’m wrong.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
