5) Bearishness Increased

Short-selling rose by 1.64 million shares at the end of 2012, and short-interest was 14.78 million shares by Dec. 31 2012. Speculators bet correctly that the company had little room to miss heightened expectations.

6) Valuation

Lululemon is trading at a P/E of 41 and a forward-P/E of 32. Similarly, a premium brand like Michael Kors is valued at a P/E of 43 and a forward P/E of 40. Gap is valued at a P/E of 16.

Share Price and Forward P/E (or “Price of Profit”):

Conclusion

The slight miss in analyst expectations is already priced into shares of Lululemon. Additional competitive threats are unlikely to surface at this time, given that existing stores have low inventory, high sales, and healthy line-ups. Lululemon is not a stock to buy, however. The company is richly valued, and the company must grow at the same rate internationally to support growth. Conversely, Lululemon would have to increase sales at its existing stores, which does not appear likely. Investors who missed Lululemon’s last run-up could look to accumulate the stock after the lower pattern reverses.

Conservative investors should wait until after the March 2013 quarterly report before committing to Lululemon shares.

The article Lululemon Premium Could be Deflating originally appeared on Fool.com and is written by Chris Lau.

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