Getting down to numbers
The single largest concern investors have regarding Lululemon Athletica inc. (NASDAQ:LULU) is its valuation. Because the retailer is, in many ways, unlike any other, it’s difficult to draw a precise comparison. A company like The Gap Inc. (NYSE:GPS) is far larger and has seen its days of rapid expansion come and go. Though the company reported strong earnings last month, its profit margins (as seen below) don’t compare to Lululemon’s and its company structure is far more traditional. Another company that can very loosely fall into the stratosphere of Lululemon is Ralph Lauren Corp (NYSE:RL) due to its loyal following and appeal to a more affluent audience. Though this is true, Lululemon outperforms in terms of profitability and operates a very different business model. From a valuation perspective, here is how these three retailers compare:
Forward Price/Earnings: 24.79
Gap: 12.19
Ralph Lauren: 18.03
PEG Ratio: 1.25
Gap: 1.45
Ralph Lauren: 1.54
Profit Margin: 18.68%
Gap: 7.25
Ralph Lauren: 10.36
Short % of Float: 29.10%
Gap: 3.40%
Ralph Lauren: 2.80%
These metrics illustrate that, although Lululemon Athletica inc. (NASDAQ:LULU)’s forward price/earnings is higher than both Gap and Ralph Lauren, its PEG ratio is lower. This points to the aforementioned growth potential of Lululemon. Additionally, Lululemon’s profitability is substantively higher than The Gap Inc. (NYSE:GPS) and Ralph Lauren Corp (NYSE:RL). The other interesting and important metric is the short percent of float. Though in the short-term this poses the potential for large fluxuations in the market capitalization of Lululemon, if you believe in the scalability of Lululemon’s business model, in the long-term this could result in the stock increasing dramatically due to short sellers needing to cover. For investors, this points to a stock that could fluctuate substantially in the short-term, but has a long-term growth strategy that is still viable and exciting.
Conclusion
Though Lululemon Athletica inc. (NASDAQ:LULU) faces the burden of a substantial company-wide recall, its core value still remains. Investors should be cautious in the short-term due to the immediate uncertainty of how much the recall with cost and what effect it will have on the brand. The future of Lululemon is bright due to its growth potential and apparent ability to operate efficiently and highly profitably. Though the short-term may be rocky, there are few companies Lululemon can be compared to from a retail operations, profitability and customer loyalty perspective.
The article Lululemon Is Far From Being A Lemon originally appeared on Fool.com and is written by Justin Weinstein.
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