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Lululemon Stock Has Gotten Ahead of Itself

Robert Martin

Between see-through yoga pants and a toxic work culture, Lululemon (NASDAQ:LULU) has faced its fair share of controversy since going public over a decade ago. Those struggles appear to be in the rear view, though, with Lululemon stock jumping to new highs in a nearly uninterrupted one-year run.

Shares of LULU have gained 63% year-to-date and have more than doubled since last spring–easily besting the broader market and its own past performances. Take a look:

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Lululemon Stock’s Momentum

What’s fueling the fun? Well, Lululemon has beaten Wall Street’s earnings expectations in each of the last four quarters. In March, it reported that net sales grew 18% year-over-year in the fourth quarter and grew 12% for the full year. Gross margins expanded by 210 basis points to 56.3%, too.

Looking forward, sales are expected to grow by 16% this year and 12% next year. There is 17% earnings growth on tap over the next five years too. But the stock’s forward P/E is twice that.

Despite the strong momentum Lululemon stock has posted–or perhaps more accurately, because of that momentum–I believe the stock has gotten ahead of itself. And the slightest sign of weakness will send investors running for the exits … again.

Retail Is Fickle

Looking at the last five years, the highest volume for Lululemon stock has always come on big-time drops. Last spring, for example, shares lost over 20% after its March earnings report. What happened? “Its spring leggings are boring,” read a headline in CNN Money.

Which offers a good reminder: retail is fickle and competitive. Sure, there is about $27 billion spent annually on yoga products in the U.S. thanks to over 20 million participants. But companies like Nike (NYSE:NKE), Target (TGT), Under Armour (NYSE:UAA), Gap (NYSE:GPS) and countless other are all well aware of that reality. All it takes is another boring product mix for shoppers to shrug at LULU and head a few doors down to buy their yoga gear.

Lululemon isn’t just a domestic play on the yoga trend, of course; it plans to reach $1 billion in international sales by 2020 and already boasts China as its fourth largest market. But that overseas expansion is already built into the stock’s price at these levels.

That’s not to say there isn’t upside left for Lululemon stock. But the stock is going to consolidate these gains–potentially in a pretty dramatic fashion–before the upwards climb continues. If you’re bullish on yoga as an ever-growing sports as opposed to a fashionable fad, use that consolidation to buy some shares.

But right now, I wouldn’t touch LULU stock at these levels or levels near them.

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

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