The Yoga Pants May Be See-Thru, But the Growth Story Has Become Murkier

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See-through yoga pants are pretty funny, so lululemon athletica’s (LULU) recall of such and the resulting profit warning Monday had a whiff of whimsy to it. But considering this mistake seriously hits the one thing that keeps lululemon shares very highly valued – its big sales gains – it will surely bring forward the question that’s been on a lot of lulu investors’ minds lately. That is: can lululemon continue to deliver what Wall Street expects of it?

We’ll get a better idea on Thursday, when lululemon reports fourth quarter results and updates first quarter forecasts. From Monday’s recall announcement, we already know a few things. Pants that make up about 17% of all bottoms sold in its stores are too opaque, and lululemon is pulling them off the shelves. That will put about a 4% dent in sales in the first quarter, according to the warning, which had been expected to rise about 30%. Comparable store sales gains in the first quarter are expected to be between 5% and 8% instead of the 11% earlier predicted. The company is still working on a profit estimate for the quarter.

While most retailers would kill for a 6% comp sales gain these days, lululemon is no ordinary retail investment. Wall Street expects very big sales and profit gains from lululemon, as evidenced by its share valuations, including PE ratio. Take a look at lululemon’s forward price to sales ratio compared to Under Armour (UA), a competitor that is also wildly popular with investors.

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LULU Forward Price / Sales Ratio Chart

Even before the exposure problem, lululemon’s same store sales growth was forecasted to slow from great gains that propelled the stock in past years. While the shares still have a lot of fans – the company’s $100-plus yoga pants are still hugely popular – worriers have emerged recently. Concerted competition from Nike (NKE), Under Armour and department stores may eventually eat at lululemon’s great profit margins. Manufacturing problems not unlike the one that led to see-through pants have hurt sales at couple of times before. Bank of America Merrill Lynch has a sell rating on the shares.

The two stock charts below show lululemon’s share price since its 2007 IPO, and then a close-up of the change in price since it announced the recall Monday morning. Perhaps there are clues there about lululemon shareholder intentions. Was the level of selling these two days commensurate with the news delivered? Or does it seem this was the excuse a lot of shareholders were looking to take profits? You decide.

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LULU Chart

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LULU Chart

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com.


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