4 Mistaken Reasons to Sell Lululemon Athletica inc. (LULU)

Will these efforts be successful? There’s no evidence to suggest Under Armour Inc (NYSE:UA), Nike, and The Gap can steal market share by simply cutting prices. Lululemon has already fended off low-priced competitors. Target Corporation (NYSE:TGT) and Victoria’s Secret entered the yoga apparel space years ago, yet this has done little to deter Lulu’s self-described cultlike following.

Lululemon has built up an incredibly loyal fan base, with customers willing pay a premium for the brand name regardless of cheaper alternatives.

Expensive Valuation

Bear argument: Lululemon is the most expensive stock in retail on a P/S and P/E basis.

Yes, Lululemon is one of the most expensive stocks the apparel space on several trailing metrics:

But context is everything.

Lululemon’s P/S ratio is skewed because the company is so profitable. Given that the company’s gross margins are the highest in the apparel space, it stands to reason that investors would pay a premium for every revenue dollar.

Lululemon’s trailing P/E ratio is also a bit misleading. Yes, the stock looks expensive at 42 times trailing profits, well above The Gap, Nike, and Under Armour. But Lululemon’s valuation is much more reasonable once we take into account the company’s growth potential, and value the stock on a PEG basis.

Foolish Bottom Line

In fairness, there are potential holes in the bulls’ thesis, too. Fashion customers are fickle. Investors must keep a close eye on the marketplace to ensure that Lululemon maintains its top spot in women’s fitness apparel.

Yet despite the bears’ claims to the contrary, Lululemon is a great investment opportunity, thanks to the company’s compelling growth story, strong moat and reasonable valuation.

The article 4 Mistaken Reasons to Sell Lululemon originally appeared on Fool.com and is written by Robert Baillieul.

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