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.
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.