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.

Lululemon Athletica inc. (LULU): Who Doesn’t Like Yoga Pants?

Over the last few years yoga pants have taken the country by storm as the apparel made its way into all aspects of life. At first primarily an athletic staple, yoga pants have become an everyday fashion option for many women. Lululemon Athletica inc. (NASDAQ:LULU), a major yoga-related retailer, reported its first quarter earnings earlier this week, and the company was able beat analyst expectations while announcing a 7% increase in same store sales.

However, shares slumped almost 18% as the company surprisingly announced that Chief Executive Officer Christine Day was stepping down from her position. Up to this point, Day has been very influential in Lululemon Athletica inc. (NASDAQ:LULU)’s success. As a result, a slew of investment analyst dropped estimates–an analyst from Sterne Agee downgraded  the company to a “neutral” from a “buy” and cut its price target to $75 from $90, citing in part “a lack of information regarding the future leadership of Lulu (that) is of great concern.”

Lululemon Athletica inc. (NASDAQ:LULU), a high growth company, trades at forward multiples that are vulnerable should any fears set in. Going into earnings, the company was trading at a forward valuation over 40 times earnings–after Tuesday’s drop the company is now trading at a more conservative valuation of 34.5 times forward earnings.  I believe that if innovation at Lululemon slows, a number of competitors stand ready to take the company’s market share, in turn further slowing growth and lowering forward valuations. I would like to highlight a couple of cheaper alternatives to Lululemon that are already starting to gain market share.

Lululemon Athletica inc. (NASDAQ:LULU)Lets first compare Lululemon Athletica inc. (NASDAQ:LULU) to a couple of competitors on a forward PEG basis. Investors can use the PEG ratio to determine if a stock may be overvalued or undervalued compared to the rest of the industry or sector. Generally, the lower the PEG ratio, the lower the valuation. Currently, Lululemon is trading at a PEG ratio far above that of its competitors NIKE, Inc. (NYSE:NKE) and The Gap Inc. (NYSE:GPS).

Lets first take look at Nike, an athletic superpower with its hands in all aspects of performance apparel. Nike sells its selection of yoga pants for around $60, compared to Lululemon Athletica inc. (NASDAQ:LULU), which retails the majority of its pants for about $100. Nike may have lower pricing power now, but I remain confident in the company’s ability to catch up in the yoga apparel industry. In addition, I feel more comfortable investing in a company that has established itself across a greater selection of merchandise. Analysts are expecting NIKE, Inc. (NYSE:NKE) to grow earnings by 27% this quarter and over 13% for the next two years. I would expect the company to further integrate its portfolio of proprietary material into its yoga apparel in the years ahead.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.