Short This Stock!
Back in the saddle with another CAPS Champion of the World contest idea. Remember, to be eligible to win the contest, you need to rate at least 1 per quarter of these ideas that we present here on the blog. But you don't even have to agree with us. You can look at the facts and disagree, so long as you enter an opinion in the contest on the stock in question. And if you're not entered, do it now. Just click on this link to get started.
That stock in question today is Lululemon (Nasdaq: LULU), and GG co-advisor Nathan Parmelee does not have a favorable opinion. Take it away, Nathan...Short Lululemon Athletica (LULU)Thesis
This time it is different. Those are the last five words most investors want to hear. But investors spying the end of the recession and retailers as potential winners in the recovery should consider that this time it really is different, because this recession is different than those of the last 20 years. This time the unemployment rate is considerably higher and may not have peaked yet. This time JP Morgan and other banks are dramatically cutting back on consumer credit and raising rates to make up for losses in other parts of their loan portfolios. This time housing is at the center of the recession, so consumers have less wealth to fall back on and are understandably more conservative. These are large, fundamental differences from the last recession and are all reasons to short Lululemon and other retailers with premium valuations. Company description
From its stores and website Canadian company Lululemon sells athletic and yoga apparel in the United States, Canada, Australia, and Hong Kong. Competitors for Lululemon include Nike (NKE), Adidas (ADDYY), and Under Armour (UA). Lulu has grown impressively over the last five years. Revenues grew at an 18.5% clip over the last five years, but the recession has thrown its growth trend in reverse with negative same store sales and single digit overall revenue growth driven entirely by new store openings. Valuation
37x P/E, 18x EV/EBITDA, and a price-to-free cash flow of about 40x are rich multiples for a company firing on all cylinders. They are obscene multiples for a company reporting same stores sales declines in the last two quarters and expecting more of the same in the next two quarters.
Using a 12% discount rate and assuming all of Lululemon’s capital expenditures are for expansion (a generous assumption) the company currently earns $59 million in free cash flow. With these assumptions Lululemon will need to grow FCF at an 18% clip over the next decade to justify its current $20 share price. Investors seem to be betting on the easier “comps” that are coming in the fourth quarter and 2005-2007 growth rates returning. But given the economic hurdles and competition I think the sales growth and margin expansion necessary to justify the current valuation won’t materialize.
Shoppers may love Lululemon’s products, but its shares are far from a good value. Short this stock.