Will Someone Please Explain Lululemon's Outrageous Valuation?

Includes: LULU, UA
by: Stone Street Advisors

Lululemon (NASDAQ: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 (NYSE: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