5 Reasons To Avoid Lululemon

Sep. 4.12 | About: Lululemon Athletica (LULU)

Will Lululemon (NASDAQ:LULU) beat or miss estimates on September 7? Some stock followers are optimistic. I'm not. Here is why:

(click to enlarge)Click to enlarge

1. Imitation. As is the case with other momentum stocks like OpenTable (NASDAQ:OPEN) and Netflix (NASDAQ:NFLX), Lululemon doesn't have a sustainable competitive advantage, as it has no barriers to entry to keep the competition out. Already Gap (NYSE:GPS), Nike (NYSE:NKE), and Nordstrom have developed their own yoga athletic gear, and compete head to head with Lululemon. Nordstrom (NYSE:JWN), for instance, is selling similar gear 30 percent below that of Lulumon, while "Nike and Gap offer also are following Lululemon's practice of tapping into yoga's spiritual ethos, an effort that makes customers feel that they're part of the community."

2. The cooling off effect. Lululemon's sales can, in part, be attributed to a craze that eventually fades away, as people get tired of it, or as another craze catches up with them. That's at least the experience from previous crazes such as LA Gear shoes and Barbie dolls.

Company

Lululemon

Under Armour (NYSE:UA)

Limited (LTD)

Forward PE

31.64

37.80

15.05

Operating Margin

28.04%

10.26%

15.34%

Quarterly Earnings Growth

39.80%

6.80%

-37.80%

Quarterly Revenue Growth

53%

26.80%

-2.40%

Click to enlarge

Source: Yahoo.finance.com

3. Saturation. Not every lady on earth is going to fall for the yoga craze and shop for new gear every other week. This means that, even in the absence of any competition, sales will taper-off as the market approaches saturation. In fact, management has already guided earnings growth lower, from the upper 20s to the upper teens.

4. A weak economy. Money consumers spend on yoga or any other leisure activity is discretionary. This means that a weaker economy will make a dent in yoga gear sales, especially for the high-end of the market where Lululemon caters.

5. Heavy insider selling. In the last six months, insider selling increased by 4.94 percent, with the total number of shares sold exceeding 7 million.

The bottom line: Economic fundamentals are catching up with Lululemon's stock, which make it ripe for a correction. Conservative investors should avoid it. Aggressive investors may want to build short positions, as I did.

Disclosure: I am short LULU, NFLX, UA. 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.