Insider Sales The Rage at LuLulemon (GPS, NKE & UA)

PE Ratio of 46-1 Should Never be in Style

Oct 3, 2011 6:08:23 AM PDT | 553 View(s) | No Comment(s) - Post a Comment Rating

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StockHQ:

LULU
$78.89 -$0.15 -0.19%
UA
$62.54 -$0.47 -0.75%
GPS
$40.64 -$0.72 -1.74%
NKE
$62.79 -$0.54 -0.85%

Fashions go in and out of style but the numbers adorning the balance sheet and income statement of Lululemon Athletica (NASDAQ: LULU) will never be the rage for an investor looking to go long, particularly when compared with competitors such as Nike (NYSE: NKE), Gap (NYSE: GPS) and Under Armour (NYSE: UA).

Lululemon Athletica is a Canadian company that makes high end female workout apparel, for yoga and other activities. Its financials should make an investor break out in a cold sweat. In the past year, there have been over twenty insider sales and not a single buy (other than option exercises). There have been five sales by insiders in September alone. Recently, the Chief Finance Officer, John Currie, said that the operating margin of 28% was not sustainable, by design, as Lululemon on a growth strategy.

A price-to-earnings ratio of over 46 is a not good foundation for growth for Lululemon, however. Selling at over 12 times book is never good for that, either. Having only $1.85 in cash per share for a price-to-cash ratio of 26.32 makes it even harder to expand. The denoument: price to free cash flow of 118.37. While LuluLemon could borrow to expand in a down economy that would certainly not seem to be propitious for higher sales of female yoga gear for over $100. The free cash flow does not leave much room to service any debt needed for growth, either.

Numbers like those naturally attract the attention of shorts. There is a short float of 11.72% for LuLulemon Athletica. A short float of 5% is considered high. By comparison, Nike has a short float of only 1.72%. Gap has a short float of 6.86%. Under Armour has a short float of 7.59%.

The shorts have been rewarded. Lululemon is down more than 12% for the week, more than 11% for the month and more than 15% for the quarter. It is trading beneath its 20 and 50 day moving averages, in double digits for both. It has a beta of 2.55 with little institutional ownership, so it is obviously a volatile stock.

Lululemon is up more than 100% for the year. It peaked at $64.49 for the past 52 weeks. It is now trading around $48.70. It should also be pointed out that Nike, Gap and Under Armour have much broader product lines that will perform better in a down economy than high end yoga gear for females. Yet, the present operating margins and net margins on a trailing twelve month basis for Lululemon are 2-3 times those of Nike, Under Armour and Gap.

While Nike has a forward price-to-earnings ratio of 15.47, LuluLemon has one of 33.35. Gap has a forward price to earnings ratio of 9.55. This explains why Lululemon's short float is so much higher than Nike's, too. It would seem likely that something has to give in the share price of Lululemon Athletica to bring it in line with its competitors and the shorts are obviously resolute in that position. So far, they have been rewarded.