Companies such as The Gap Inc. (NYSE:GPS) and Under Armour Inc (NYSE:UA) are waiting in the wings for the sorts of missteps that could bring Lululemon down. Missteps like releasing clothing that you can see through. Lululemon has estimated that the shortage is going to cost it $7 million to $17 million.
The more troubling thing, from my perspective, is that in the last quarter, comparable sales grew by only 10%. That might sound great for another company — The Gap Inc. (NYSE:GPS)’s sales grew only 5% last quarter — but it’s not great for Lululemon Athletica inc. (NASDAQ:LULU). It was a quarter of slowing of growth in a year that averaged an increase of 16%. The company has also forecast an even greater fall this coming quarter, with comparable sales growing in the high single digits. That’s a hard knock to shrug off, and it’s going to be even more difficult if the company can’t get past its quality issues quickly and cleanly.
Those problems — quality, inventory, and sales — combine to make Lululemon a risky proposition, in my mind. The company trades at a heavy premium that puts it in the P/E range of Under Armour Inc (NYSE:UA). But right now, it has a plethora of downsides and very little light at the end of the tunnel. Sure, international expansion could be excellent, but investors have been waiting for at least two years to see meaningful international growth — how much longer do they need to wait?
For the foreseeable future, I’m going to steer clear of Lululemon Athletica inc. (NASDAQ:LULU) and stick with either The Gap Inc. (NYSE:GPS) or Under Armour Inc (NYSE:UA). Both companies are expanding and making changes to their businesses that look like good long-term decisions. Also, since this is the last line, insert your own joke here about transparency in business.
The article Why Investors Should Avoid Lululemon originally appeared on Fool.com.
Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends lululemon athletica and Under Armour and owns shares of Under Armour.
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