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Lululemon Stock Warrants Caution

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  • Lululemon has seen its growth decelerate. Return on equity and operating margins are falling.
  • LULU will need to revise down its target of achieving $4 billion in revenues by 2020.
  • The company currently is having a leadership vacuum which creates a possibility of execution risk.
  • Lululemon stock continues to trade at rich valuations.

Lululemon (NASDAQ:LULU) has been at the forefront of the athleisure trend. Riding on the trend, the company has managed to deliver both top-line and bottom-line beats in the last four quarters. In our previous coverage on Lululemon, back in September, we had suggested that the company and by extension, the stock, would continue to do well in coming months. The stock is up 35% since then.

Source: amigobulls.com

There is no doubt that Lululemon is a very strong brand and a good business. Also, the company's main growth driver, the "athleisure trend" is here to stay. The company has been expanding its business into new products and geographies. In the last couple of years, the total number of stores has grown by 168% to a total of 776 stores. Also, there seems to be good demand for the company's products in the overseas markets.

While the company is primarily focused on women, it is also showing strong growth in the menswear segment. The company focused on providing men with more choices in the form of design and color. Lululemon has already invested significant resources on this front. The company has released new styles of its best-selling men's ABC pants. These efforts helped it drive 26% YoY growth in comparable sales in the men's pants category.

Expensive valuation

However, we must be mindful of what price we pay to acquire a piece of this business. The latest rally in Yoga brand's stock price has led to significant multiple expansion. Lululemon stock is currently trading at a P/E of 41x, up from 30x six months ago and from 23x in the beginning of April last year. This is not only much higher than the industry P/E of 27x, it is also towards the higher side of the company's five-year average. A similar movement

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Analyst’s Disclosure: I/we 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.

This article was written by Kumar Abhishek, an equity analyst at Amigobulls. Neither Amigobulls nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carry the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls nor the author has any business relationship with any of the companies covered in this post.

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