What’s Next After Lululemon’s Stock Plunge

lululemon athletica (LULU) shareholders had a horrible 2013, hit repeatedly with price-plunging news about management, manufacturing and supply chain issues. Monday’s warning from the company of slow January sales did little to make investors more hopeful about 2014 returns. But the subsequent 17% share price fall did significantly reduce one risk that’s plagued lululemon shares for years.

LULU Chart

LULU data by YCharts

Despite bursts of worrisome news, lululemon’s stock valuations in late 2012 and most of 2013 were still unusually enormous. Lululemon’s high PE ratios, well-above peers, created a heightened lululemon investment risk that YCharts harped on in numerous columns.

As late as June, lululemon’s historic price-to-earnings ratios were running nearly twice as high top athletic gear makers like Nike (NKE) and Columbia Sportswear (COLM).

LULU PE Ratio (TTM) Chart

LULU PE Ratio (TTM) data by YCharts

Monday’s crash has brought lululemon’s forward PE ratio into more ordinary territory. It’s a veritable bargain compared to Under Armour (UA).

LULU PE Ratio (Forward) Chart

LULU PE Ratio (Forward) data by YCharts

Lululemon’s revaluation alone hardly constitutes a good reason to buy the shares now.

Monday’s revenue forecast revision pointed to a “meaningful” drop-off in traffic and sales since the beginning of the year. A new CEO has been on board only days, and it’s unclear whether he will still have to resolve manufacturing and supply issues, like those that produced see-through pants last year and mismatched inventory in recent months. Competition may have finally found lululemon’s customers, as YCharts discussed in this December lululemon column.

The news that sales are down makes more likely a drop in lululemon’s famously high operating margin, which could scare off more investors.

And even now, YCharts Pro's lululemon Rating is below average for value.

The end of lululemon’s incredible valuation, however, means we can expect at least a smattering of bullish commentary on the shares. If the buy recommendations sound intriguing, chart the fundamentals and the ratios yourself, unleash some financial advisor tools, consider the issues on the ground, and proceed with caution.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.



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