Lululemon Gets Squeezed

Here’s a short piece I wrote for FashionInvestor.com about Lululemon Athletica’s major price drop recently:

“One of our favorite stocks (not to mention a strong, growing brand), Lululemon Athletica, has been getting hammered in the stock market of late. Just over a hour into the trading day, it’s down slightly over one percent at 40.85, a nearly 29% drop from its recent high on October 22nd at $58.00.

Why the drop when Lululemon is expanding and growing sales at a lightning-fast pace? A lot of things are weighing on the stock, one of them is profit taking. Those who were able to secure IPO shares at $18 have been selling to cash in on rising shares, some having profited more than 200% in under 3 months. In addition, Lululemon has so much going for it that investors have bid up its shares to a sky-high valuation, and Lulu would need to grow much faster to deserve this kind of price premium.

Long term, we still have bullish sentiment for Lulu, but investors beware, whenever you make a big gain, others will often run for the exits to take profit, and this is something you must factor in your decision making.”

I didn’t go into further detail about valuation: another big reason for Lululemon’s fall is that it’s priced into the sky by almost any measurement. Forward price to sales is roughly 11, whereas other popular apparel stocks like UnderArmor and Crox sport P/S ratios around 3.

Link via FashionInvestor.com.

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