The Street has always had a habit of comparing two companies regardless of whether the companies are reasonably comparable or not. This time, Lululemon Athletica inc. (NASDAQ:LULU) is being compared to Apple Inc. (NASDAQ:AAPL). Thanks to Apple’s historic rally, the general perception is that if a rapidly growing company’s CEO leaves abruptly, and its shares take a deep plunge, but then its shares will most likely bounce back. However, here are a couple of reasons that suggest that Lululemon Athletica inc. (NASDAQ:LULU) won’t rebound like Apple.
Lofty valuations
First, Apple Inc. (NASDAQ:AAPL) was exceeding the Street’s expectations back in 2011. It was innovating new products and was showing absolutely no signs of slowing down. Its shares were trading between a P/E of 12 and 20 throughout 2011, while its operating cash flows grew by 182% during the year. Naturally, if a rapidly growing company with tremendous growth prospects becomes cheaply available, pouncing on the stock makes sense.
However, Lululemon Athletica inc. (NASDAQ:LULU) started showing signs of a slowdown back in January. The company had been reporting double-digit growth rate in its same stores sales for 13 straight quarters, which dropped to single digits during its Q4. Nevertheless Lululemon Athletica inc. (NASDAQ:LULU)’s growth rate is still high for a mature business, and a slowdown is justified after its prolonged streak of impressive quarters.
But prior to its crash, shares of Lululemon Athletica inc. (NASDAQ:LULU) were trading at lofty valuations — with a P/E of 45 or more — which seemed to be overblown by the Street’s high expectations. If a company is growing at a rapid rate, then the Street doesn’t mind paying a premium. But over the last three years, its operating cash flows have risen by just 14%, while its trailing P/E has been hovering over 35. A company that’s gradually slowing down clearly doesn’t deserve such lofty valuations.
The exit
It’s a well-known fact that Steve Jobs had to leave Apple Inc. (NASDAQ:AAPL) due to his worsening health condition. But the CEO of Lululemon Athletica inc. (NASDAQ:LULU), Christine McCormick Day, left Lululemon due to personal reasons. Shortly after the announcement, Lululemon was downgraded by several investment research firms.
Without reading too much into her reasons, I believe that focusing on what happened during that week is of vital importance. Just two days before Lululemon announced the sudden exit of Christine Day, Chairman Dennis Wilson offloaded $50 million worth of his personal holdings in the company. According to Wall Street Journal, “The sales were made as part of a prearranged trading plan known as a 10b5-1, which lets executives buy or sell shares in their own company according to preset conditions even if they have inside information at the time of the sale that could affect the stock price.”
