LULU Lost its Luster

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Wow, Lululemon’s (LULU) really lost its luster. LULU’s profit estimates have dropped four quarters in a row, and now profit growth is expected to decline for the next two quarters. Still, the stock is expensive, as it sells for 23 times earnings.

And this week in the news LULU’s founder is considering a buyout of the company. Good luck with that. I think before that can get accomplished the company has to gain some stability in regards to its profit estimates. You can’t borrow with the expectation the company will make $2 in profits next year, because four quarters ago the company was expected to make $3 in 2015. With that trend, one could argue the company might only make $1 next year (unlikely) and for $41 a share that’s a high price to pay.

One Year Chart

LULU_2014_Q2This stock had been terrible since it dropped in December. Quarterly profit growth has averaged only 5% the last four quarters (bottom/left) and estimates look even worse.

Yet LULU still has a P/E of 23. I wouldn’t consider the stock unless the P/E got down to 20 — and estimates stopped falling.

Fair Value

LULU_2014_Q2_FVA 20 P/E on the stock puts my 2014 Fair Value at $35. These charts and tables were done on 6/25 when LULU was $41. Today, 7/3, the stock is $43. Even if we look out a year, to 2015’s Fair Value the stock doesn’t seem to have upside.

Sharek’s Take

Lululemon used to be a fabulous stock to own, during its glory days of 2009-2012. I covered the stock at the time, and can tell you a key ingredient to the stock’s rise was earnings estimates were rising — fast. Now LULU is at the other end of the spectrum, with earnings estimates declining fast. I would like to say this stock is a good buy on a dip but the P/E is too high and these numbers keep going down. This isn’t a stock I’m interested in at this time.

View the Earnings Table here.
View the Profit History here.
View the Ten Year Chart here.
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David Sharek David Sharek is stock portfolio manager and CEO of DavidSharek.com. David believes a company's profits ultimately drive the price of its stock. His book The School of Hard Stocks can be found on Amazon.com.