I’ve been counting down the days since I heard that hip yoga-wear retailer lululemon (Nasdaq: LULU) was going to IPO. This is exactly the kind of growth story I love to see - a foreign company whose initial foray into the US has been greeted with wild excitement by affluent urban tastemakers. Walk into any yoga class in Chicago or New York and you’ll see women and men of all ages going into downward dog adorned with lululemon’s distinct omega-esque logo. It’s just a matter of time before this sight spreads to the rest of the country.
I figured that lululemon would undoubtedly be the next in a recent run of hot clothing stocks to go on a tear. Despite recognizing their popularity early on, I largely sat on the sidelines as the stock prices of Zumiez, Under Armor, and Crocs (which I did hold briefly) soared. I was never able to pull the trigger as the stocks always seemed too richly valued. I vowed that I wouldn’t make the same mistake this time with lululemon.
It seems as though a lot of investors made the same promise and wanted to load up on lululemon at any price. In comparison to the IPOs of the aforementioned companies (and Citi Trends, another recently IPOed retailer), lululemon appears to give new meaning to the word “overvalued.”
Like LULU, all four of the other companies soared on their first day of trading. And all four of the companies have posted huge annual returns since that first day close (interestingly, each company also found its stock at a lower level 1 week after the initial IPO). But it seems as though investors may have learned their lessons and banked enormous future growth assumptions into lululemon’s initial valuation.
Let’s take a look at all four of these companies today.
How does lululemon’s valuation stack up? Not well. In terms of estimated growth rates, the closest comparison is Crocs. Despite an amazing track record as a public company and future growth estimates exceeding lululemon’s, Crocs is selling for a forward P/E that is 75% lower. While one can argue that this makes Crocs undervalued, I tend to see a 29 forward P/E as fair for a growth company.
And unlike Crocs, lululemon’s growth is limited by the number of stores it can build. The company currently has 59 locations and plans to build another 20 to 25 this year. As Crocs’ popularity grew, it quickly able to scale up its distribution to thousands of retailers. For lululemon to ultimately fetch the same valuation as Crocs, which would not even triple the stock price, it would have to produce approximately 20x more profit than the $7.7M it earned last year. Furthermore, as SmartGuyDH wrote on July 16, it’s unclear whether lululemon’s primary purpose for going public was to fuel growth.
Don’t get me wrong- I would love to own shares of lululemon, just not at this price. This is a company with 25% same-store sales growth and $1400/sq. foot sales, which may be the best in all of retail. It capitalizes on the current yoga craze with desirable, high-priced products. But ultimately, this is a niche retailer whose “cool factor” has caused the market to get ahead of itself. Keep lululemon on your watch list, but don’t count on it to produce the same eye-popping returns of the hot retailers that came before it.
Disclosure: SmartGuyAB does not own shares in any of the companies mentioned.