Stay Away From Lululemon

| About: Lululemon Athletica (LULU)

Summary

Lululemon’s growth has slowed down remarkably as the company battles with a number of problems.

Lululemon’s new CEO is looking to turn things around through expansion and brand re-building.

But Lululemon’s valuation and negative analyst sentiment make the company a risky investment.

Athletic apparel and accessories maker Lululemon Athletica (NASDAQ:LULU) is having a tough time. The sheer pants controversy led to a massive public relations disaster while the resignations of ex-CEO Christine Day and founder Chip Wilson also added fuel to the fire. Moreover, Lululemon's growth has slowed down remarkably.

In the recently-reported fourth quarter, Lululemon's net revenue increased 7% to $521 million from the year ago period. Although its gross profit for the quarter rose 2% to $278.8 million, gross margin decreased to 53.5% from 56.5% a year ago.

However, Lululemon is looking to make a comeback and hired Laurent Potdevin as CEO. Let's see what moves the company is making to bring about a turnaround and if it could succeed in doing so.

Expansion and brand re-building strategies

Lululemon's new CEO says that 2014 will be a year where the company will be making investments to grow the business in a sustainable and controlled manner. Lululemon will be opening its first store in London, and as a promotional strategy, it has been hosting yoga sessions at the Royal Opera House. The response it has received so far has been overwhelming. On March 9, 700 people queued for the event two hours before it started, double of its expected capacity. To keep the extra audience engaged, Lululemon started additional community activities like cheeky yoga. Moreover, the company is providing complimentary yoga classes throughout London.

Lululemon has organized many such events and it has received a good response. Its SeaWheeze half marathon race sold over 10,000 spots in 66 minutes, with 45% of the guests registering from outside Canada to support more than 100 Olympians through yoga. Lululemon is looking to take the brand across the globe to tap more markets and bring in more customers.

Focus on product development

Lululemon sees increased demand for seasonal products, which occupy a larger share in its product mix. Customers have been buying these items at a pretty fast rate, as a result of which Lululemon is experiencing sell through at a rate four times faster than anticipated. However, Lululemon also understands the threats that it faces as customers can shift to other options if they are not satisfied. As a result, the company is working upon product development.

So, along with expansion, Lululemon is very keen on innovation and product development as it believes that the right product is the key to success. It is trying to generate excitement with capsules and collaborations. Such offerings include lab-co-lab and go capsules, which were a success among consumers.

Massive concerns here

However, Lululemon had a tough time last year as it struggled with bad publicity, slowing growth, and a product recall. To top all that, Lululemon was accused of defrauding shareholders. So, it might be quite some time before the company regains its popularity once again. As such, at a trailing P/E ratio of 27, Lululemon looks like a risky proposition as it trades at the industry average P/E.

Analysts aren't quite confident about the company's prospects either. Lululemon's earnings are expected to grow just 0.50% this fiscal year, with a whopping 20 analysts decreasing their earnings expectations. So, it makes sense for investors to stay away from Lululemon until and unless the company gives out signs of a turnaround or trades at cheaper levels.

Conclusion

Looking forward, Lululemon's management is positive about the turnaround, led by its new CEO Laurent Potdevin. However, they will have to deliver and execute well in order to get better. Given the company's valuation levels and cloudy forecast, investors shouldn't risk their money in Lululemon just yet, and wait for concrete signs of a turnaround.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.