Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Should You Risk Shorting Lululemon Athletica inc. (LULU) Stock Today?

Short-sellers love to hate Lululemon Athletica inc. (NASDAQ:LULU). However, the Canadian company continues to prove its critics wrong despite recent product recalls and quality-control issues. In fact, Lululemon Athletica inc. (NASDAQ:LULU) stock is up more than 18% in the past quarter. So is it ready for a pullback? Let’s take a closer look and uncover whether this stock is still a good play for short-sellers today.

Lululemon Athletica inc. (LULU)Sheer folly
The luxury athletic apparel company has rebounded nicely from a PR nightmare in March, in which Lululemon Athletica inc. (NASDAQ:LULU) was forced to recall more than 17% of its signature luon pants from store shelves. At the time, quality-control issues related to the retailer’s recall sent short-sellers into overdrive. In fact, the number of Lululemon Athletica inc. (NASDAQ:LULU) shares sold short during the last two weeks of March ballooned by as much as one-fifth, according to Yahoo!

Nevertheless, the stock has made a solid comeback since then, with shares hitting a fresh 52-week high of $82 earlier this month. While some of the shorts retreated, the stock’s short interest of more than 17% is still high. For comparison, NIKE, Inc. (NYSE:NKE), one of Lululemon Athletica inc. (NASDAQ:LULU)’s biggest competitors, has a short interest below 1%, in large part because Nike trades at a much more reasonable valuation than Lululemon Athletica inc. (NASDAQ:LULU).

With the S&P 500 boasting a P/E ratio of 17 and NIKE, Inc. (NYSE:NKE)’s price-to-earnings of 25, it’s hard to justify buying Lululemon’s stock at around 43 times earnings. Of course, this metric doesn’t paint the whole picture. It’s worth noting that Lulu commands a loyal customer following, strong revenue growth, and some of the best margins in the industry. While I don’t plan on buying more shares here, I also wouldn’t dare short the stock.

The short of it
Lululemon faces competitive threats from some deep-pocketed rivals, including Nike, Under Armour, and Gap. The competition could hurt Lulu’s market share over the long run. However, if you were planning on betting against the company, I’d suppress those instincts for now.

The once-lofty expectations for this stock have been reined in, and the company seems to have a handle on its recent luon recall. Moreover, as the retailer’s supply chain matures and quality-control issues are resolved, I suspect we’ll see a stronger, more efficient Lululemon emerge.

The article Should You Risk Shorting Lululemon Stock Today? originally appeared on Fool.com.

Fool contributor Tamara Rutter owns shares of lululemon athletica. The Motley Fool recommends lululemon athletica and Nike and owns shares of Nike.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Loading Comments...