Skip to main content

Inside the Market Lululemon: Priced for perfection, without delivering it

Exteriors of the lululemon store on Queen St. West photographed June 7 2012

Fred Lum/The Globe and Mail

Investors are having second thoughts about Lululemon Athletica Inc.'s lofty valuation. Big valuations are usually reserved for companies that can grow their revenues or earnings at an impressive pace, consistently, quarter after quarter. Lululemon no longer fits this description.

On Monday, the yoga-wear company warned that its fiscal fourth-quarter results would be lower than expected. It now sees earnings ranging between 71 (U.S.) and 73 cents a share, down from an earlier estimate that ranged between 78 and 80 cents a share.

Any earnings warning is bad news, but this one has an additional layer of concern: The new estimate is lower than Lululemon's earnings in the fourth quarter of last year, when it reported adjusted earnings of 75 cents a share. In other words, there is no growth here for a stock that is priced for strong growth.

Story continues below advertisement

The shares fell more than 16 per cent in early trading on Monday after the announcement, taking the share price to a two-year low of $49 in New York. For sure, there are operational issues at work – largely related to severe PR damage following a recent product recall and controversial comments from the company's founder about women's body shapes.

But the bigger issue is the stock's valuation: It is coming down in a big way, and it deserves to come down further. The shares now trade at 26-times trailing earnings, which is still steep for a stock that has been disappointing investors. The stock traded at 30-times earnings before Monday's warning, and 80-times earnings in early 2012, when the shares traded at $80.

A stock that is priced for perfection can do okay when perfection is delivered. Lululemon isn't anywhere near perfection.

Report an error Editorial code of conduct
Tickers mentioned in this story
Unchecking box will stop auto data updates
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter