In A Yoga Pants Glut, What’s lululemon Worth?

If you’re a holiday shopper trying to buy yoga pants for that someone special, the incredible selection this year should delight both your fashion sense and your budget. If you’re an investor hoping to make money on yoga pants, that sudden abundance of choice in this once esoteric product should look pretty scary. Shares of lululemon athletica (LULU), the high performing retailer that made yoga pants both stylish and expensive, have never been more vulnerable.

LULU Chart

LULU data by YCharts

lululemon made its shareholders incredibly wealthy by opening high-end athletic apparel stores with a particular focus on yoga. With a loyal clientele, built both by specialized clothing and boosterism for yoga, lululemon turned athletic gear into everyday wear for women. Its same store sales topped the industry, and its stores brought in more revenue per square foot than any other apparel retailer on the continent.

LULU Revenue (TTM) Chart

LULU Revenue (TTM) data by YCharts

But competitors that were still getting organized last year are going strong now. The lululemon pants I paid $98 for in 2012 look an awful lot like $35 and $50 pairs I just saw at Sports Authority; Victoria’s Secret, owned by L Brands (LB); and Dick’s Sporting Goods (DKS). Macy’s (M), Nike (NKE), North Face and Under Armour (UA) are all selling products barely discernable from lulu’s. The Gap’s (GPS) Athleta store in Georgetown looks so much like the lululemon shop down the street that there seems little point in visiting both. And discount stores like T.J. Maxx (TJX) and Ross (ROST) sell plenty of cheaper yoga pants for those who want the look but don’t plan to sweat; the style minus the high tech fabrics for as little as $12.

What's next -- yoga pans at your neighborhood 7-Eleven? Truck stops?

Share prices the companies that have already jumped into the yoga pants movement, all of which have much wider product lines than stretchy pants, are only mildly affected by their successes or failures in yoga style, as seen in a stock chart.

DKS Chart

DKS data by YCharts

lululemon doesn’t specificially break out the pants numbers, but we got an idea of their outsized significance to its earnings last spring, during the company’s infamous recall of see-through pants. Those pants, the company said, were about 17% of all bottoms sold. The recall cost $43 million in revenue, which equates to about 12.5% of last quarter’s total revenue and took several percentage points off of store sales figures. A yoga pants fiasco at lululemon rocks both the share price and the sales. Unleash equity research tools on the stock if you're curious.

LULU Revenue (Quarterly YoY Growth) Chart

LULU Revenue (Quarterly YoY Growth) data by YCharts

The stepped up competition comes as lululemon once-brilliant leadership seems to be faultering. Founder and chairman Chip Wilson got into hot water last month by suggesting that sheerness and pilling in some lululemon pants were caused by thick thighs, or maybe the purses or seatbelts that shouldn’t be rubbing against them. It was a particularly stupid thing to say about his own “active wear” product and, especially, about his customers. It also reminded everyone of the see-through debacle just when the company should have been able to move past it. Also, the company has reported no progress whatsoever on finding a permanent CEO. Co-founder Christine Day announced in June that she would resign as soon as a replacement is hired.

While these issues have taken out all the share price gains of the past year, they have done little to normalize the share price. Valuations, as measured by forward PE ratio, remain outsized for the sector, even as growth is naturally slowing.

LULU PE Ratio (Forward) Chart

LULU PE Ratio (Forward) data by YCharts

lululemon has clearly shown that there’s money to be made in a high-end, niche-focused athletic apparel. But a lack of leadership, fluff in the stock price and a burst of competition look like a recipe for investor disappointment. Without some strong sales growth, at a time when it will be particularly hard to deliver it, lululemon may become a good company that’s a bad investment.

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 Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.



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