Ahead of Earnings, Lululemon Is Still Not Cheap

Lululemon Athletica Inc. (NASDAQ: LULU) is due to report earnings this week, and the reality that investors need to face is that it is still not exactly a cheap stock. One report from Canaccord Genuity said that the sporting and yoga-themed apparel company’s 2014 guidance could be the last domino to fall.

The analyst lowered estimates to brace for another round of bad news, but it maintained its formal Buy rating while lowering its price target to $69 from $73 per share.

What 24/7 Wall St. wants to show is that Lululemon simply remains an expensive stock. The only good news is that it is not a wildly expensive one. Still, the damage done here seems severe enough that its chance to stage a snapback stock price rally and a snapback recovery in its image has likely come and gone.

What is interesting is that in the past 90 days, the earnings estimate for this quarter has only dropped by seven cents per share, or about 10%. Shares have fallen more than 16% in that time, but they are down 40% from the $82.50 peak of 2013.

On top of that, the $7.1 billion market cap is roughly 4.5 times its sales. Again, the company has offended some of its customers directly and other customers have decided to spend their money elsewhere.

Now, let’s go out a year to see where Lululemon is still expensive. The Thomson Reuters consensus earnings per share estimate is $2.16 (growth of 14%). Sales growth is expected to remain 15%. With all the problems that Lululemon has had, its stock still trades at almost 23 times earnings, based on a $49 share price.

The question is whether Lululemon can grow this much in the year ahead after posting only about 2% growth in the past year or so. Unfortunately, the retailer may have to get that sales growth from opening more stores rather than milking out higher and higher sales from its comparable stores, open a year or more.

Our question is what sort of growth shareholders really will see at Lululemon. A $7 billion value sounds high, but it was valued at more than $10 billion in market cap before its problems knocked it down.

Lululemon reports earnings on Thursday. We will follow up with a more detailed earnings preview ahead of the report.