Will Someone Please Explain Lululemon's Outrageous Valuation?

Lululemon (LULU), maker of sexy, butt-hugging yoga pants (and some other stuff too), trades in the realm of fantasy. I say this because, at the current price and earnings, they're going to have to double earnings over the next say fiscal year (+/-) to bring the valuation even remotely in-line with other high-growth clothiers/retailers.

Of course, they have to do this in a softening economy, with niche products which do not appeal (and more importantly don't FIT) the majority of people (especially) in America. Oh, and their CEO is leaving and they just shuttered their stores in Japan. I link to the Motley Fool article because I think its emblematic of the hysteria surrounding this particular company. Take, the comparison versus far-larger retailers American Eagle Outfitters, Abercrombie & Fitch, Hot Topic, and Aeropostale. Um, hello? Apples to oranges anyone?

Lets compare to what I think may be the closest comp: Under Armour (UA). Both companies are roughly the same market cap, about $1.7bn for Under Armour and around $2bn for Lululemon. Both are high-growth, speciality retail plays focusing on active/athletic markets. Under Armour trades somewhere around 35x ttm earnings, while Lululemon, depending on who you ask, trades somewhere around 75x. I think its safe to say Under Armour has a far larger and deeper customer base than does Lululemon (think otherwise? Please enlighten me in the comments below), and that their margins and revenues will hold up well in a recessionary environment as their products are not (on the whole) prohibitively priced.

Lululemon, on the other hand, is very focused on the niche "yoga-wear" market (and culture, blech). Ok, so now everyone take a deep breath and lets think about this, k? Lululemon makes very specific type of clothes for a very specific type of activity. They aren't exactly cheap, they're very form fitting (in a country where most people are overweight, to say the least), and to rationalize the stock's current valuation, they have to essentially double earnings. Did I mention how trendy their products/brand is? No? Ok, well it is. Don't try to argue with me on this one, just trust me, Ok?

So, with all that being said, someone please explain to me how Lululemon is trading at 2x the valuation of arguably their closest competitor.

Disclosure: None

Comments

[seeksome:]

UA is definetly a better buy the valuation is more in line than lulu.Get your UA gear at bargain prices here:seeksomething.com

2008 Apr 18 07:19 AM

[FredMertz:]

UA is a terrible comparison. Not a retailer so they must share margins with another party and already dramatically overdistrubuted. There are no retailers with any market cap that have the growth potential for stores and sales that LULU has. Comparative multiples is a wasted exercise as there is nobody who matches LULU on opportunity going forward.

2008 Apr 18 10:54 AM

[podjo:]

hey knockout, put your wife or girlfriend in a pair of their pants and then ask that question. LU can make any woman's butt look good and that goes a long, long way.

2008 Apr 18 02:17 PM

[kayin18:]

lulu's business isn't yoga wear, its active living and the promotion of social well being. walk into a lulu store and its speaks culture, not yoga. this is what sells the clothing. the majority of lulu outfitted individuals haven't even practiced yoga, but they want to be part of the culture that lulu has marketed so well. with only a handful of stores south of the canadian border, there is huge expansion opportunity and lots of reasons to believe they can continue to sustain this growth even in an economic slide.

2008 Apr 18 11:26 PM

[Martin Clou...:]

This is a case of misunderstanding the business, but drawing the correct conclusion anyway.

Lulu is a trend/lifestyle brand that is much more than yoga. It sells an active, healthy, socially responsible lifestyle - whatever that is - versus the performance, competitive edge that UA sells. I think you can compare those 2 companies, up to a point. They are certainly high growth, have great marketing targeting people that don't really need their stuff but will buy them anyway. I'm no athlete but I train in UA T-shirts and my wife in Lulu's.

But at a PE of 71 and a market cap of 1.5B, I'm not a buyer of their stock. I've been eyeing UA stock for a while, but even at these valuations (PE 35, cap of 1.6B ) I'm still uncertain...But I believe they will continue to grow. How much, how long, how fast, that's the question, the answers would tell me if these valuations were worth it...

2008 Apr 19 07:57 AM

[Canuck Inve...:]

I read the prospectus but didn't invest went it listed. It's more than just another retailer. It has a cult following and tremendous growth potential. It could become the Starbucks of fitness wear with a devout following and very high penetration. But high-flying retailers trade at crazy valuations. I tend to avoid retailers because I dislike losing money but LU does have some real potential. It's unfortunate that it probably will never trade at a valuation that would entice me to buy. Yes, the business will grow but much of the growth is already priced into the stock.

2008 Apr 20 06:11 PM

[happyhungarian:]

This article is a perfect example of someone trying to make a financial decision on a company when they clearly do not understand anything about the product and culture of a company. First, this is not a niche clothing retailer; unless of course you consider women (52% of the population) as a niche market. Second, people label Lululemon as "yoga apparel" when it is clearly (and self-proclaimed) as "yoga-INSPIRED apparel". Third, people point out the fact that many of the articles of clothing are form-fitting which clearly shows that they have never gone into a Lululemon store to see the people trying on and, in the end, buying their products. The people that this article refers to as "overweight, to say the least" actually love Lululemon for many of their loose-fitting, and highly stretchable and flexible products. Customers who are "overweight" consistantly proclaim Lululemon's product as the most comfortable everyday and leisure clothing they have ever worn. Fourth, this article also fails to mention Lululemon's large selection of MALE clothing which also attracts men of all ages, shapes, sizes, and activity levels. Fifth, Lululemon is constantly compared to Under Armour as their main competitor. However, one HIGHLY important factor is failed to be mentioned; Lululemon is a RETAILER and Under Armour is a CLOTHING COMPANY. This means Lulu does not share margins and Under Armour DOES.

Approaching Lululemon with little or no understanding of their product, culture, and appeal and then looking at their financials can lead people to wonder why LULU is trading at the level they are. This is clearly what the author of this article has done. Walk into a Lululemon location, speak with the employees, speak with the customers, feel and try on their products. This is the only way to truly get a grasp of the potential of this company.

2008 Apr 21 05:46 PM

[matb415:]

try walking into a Lululemon store, I have never seen a store so busy, it was a stampede, when Nordstaums first started people said you could ever make a living selling women's shoes, don't try to predict women's fashion trends,

2008 May 02 01:14 PM

[Angelic Pas...:]

I have been reselling Lulu online for over two years and my biggest sellers are sizes 12 and 14. So do not assume that just size 4 and size 6 women wear Lululemon. Lululemon is of very high quality and yes it is the most comfortable active wear I have worn.

2008 May 29 08:35 PM

[Knockout An...:]

Gents, please excuse me here, but I'd like to clarify a few things.

1. I have been to the stores, and while larger individuals are buying, please, spare us all. (oh, and its called sarcasm, btw, maybe some of you have heard of that before, no?)

2. I understand its a 'lifestyle' brand - so is UA friends. The business model (apparel vs. retailer) is apparent, and wasn't lost on me. The point was to compare two BRANDS who do - more or less - the same thing and are traded (high-growth retail/apparel) similarly.

3. Scoreboard! I shorted at 36ish, the stock today stands at about 1/2 of that. Clearly, I wasn't the only one who noticed the company was so grossly overvalued.f

2008 Sep 07 02:54 AM