In a world where most clothing retailers are looking just to survive, Lululemon Athletica (NASDAQ:LULU) shares are selling for almost 10 times the company’s revenue. It makes no sense. LULU stock has matched the NASDAQ market and started the week down just 2.5% on the year.
The market cap of $29.4 billion is more than that of Under Armour (NYSE:UA), Macy’s (NYSE:M), Kohl’s (NYSE:KSS), Gap (NYSE:GPS), Nordstrom (NYSE:JWN) and Tiffany (NYSE:TIF) combined! Even mighty Nike (NYSE:NKE) sells at just 3.5 times its sales.
LULU stock’s price to earnings ratio of near 45 is 50% higher than that of Microsoft (NASDAQ:MSFT), twice that of Apple (NASDAQ:AAPL), higher than any Cloud czar not named Amazon (NASDAQ:AMZN).
Yes, it is growing at 20% per year. Yes, profits are rising even faster. But there’s a virus out to kill us all and you’re buying yoga shorts?
Lululemon’s Secret
Yes, but they’re great yoga shorts. Yes, but you can wear them to work now, and I’m sure many people do. Yes, yoga is wonderful for aging bones, of which America has many. I’ve got about 200 pounds of them myself and have been hitting the mat nearly every day.
Lululemon Athletica has, as Women’s Wear Daily put it recently, a winning formula. For long-term investors, it has been a long-term winner, as our Matt McCall noted recently.
But you don’t have to pay $68 for yoga shorts. Even a premium yoga mat costs just $50, not $70, and it lasts for years. They want $18 for a block I can get for $8 at Target (NYSE:TGT)?
It’s true that Lululemon is a lot more than a yoga store. They sell clothes for runners, they sell ball caps for golfers, they even sell trench coats. Lululemon has evolved into a fashion house, a designer label, and a lifestyle.
Disappointment Coming?
All this is still available online. The company has one of the best web sites in retail. But CEO Calvin McDonald has closed stores around the world. The company will continue to pay its employees through June 1 even if they stay closed. Senior leaders have taken a 20% pay cut.
Lululemon has yet to offer pandemic-era earnings. Those are due June 25, for the quarter ending in April. At last check, analysts were still expecting earnings of 30 cents per share, on revenue of $740 million. Those are close to the numbers from a year ago.
I don’t see how they’re going to do it. I’m hitting the mat every day, but I’m also watching every penny. Even upper middle-class, work-at-home heroes are taking pay cuts, as the global economy slides into either a short or long depression. Lululemon CFO Patrick Guido has already announced he’s leaving to join (checks notes) an Atlanta-based car dealer?
Guido is leaving the company in great shape. Lululemon had $1.1 billion in cash on the books at the end of January. There is no long-term debt. Over the last year the company had $670 million in operating cash flow on that $3 billion of sales. For a clothing retailer, all this is admirable.
Bottom Line on LULU Stock
The problem is that Lululemon Athletica is still a clothing retailer.
Lululemon is a premium brand at a time when premium clothing is out of fashion. It can’t afford to do deep discounts because that would violate the brand image. The novel coronavirus also caught Lululemon in the process of opening 51 new stores.
In short, while LULU stock has great underlying core strength, its valuation is stretched and, like me, it may be about to pull a muscle.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology 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 shares in AMZN, MSFT and AAPL.
