What to Watch Out For With Lululemon


lululemon athletica has been an undeniable success story since its IPO in 2007. While shares fell along with the broad market during the financial crisis, investors who bought in at the market bottom in 2009 could have booked more than 30 times their initial investment. The company has consistently wowed the market with double-digit same-sales growth and revenue growth near 50%, but on Wall Street, great performances bring great expectations. The stock trades at a hefty P/E of 47, meaning a surprise earnings miss could send shares tumbling. The following excerpt from our premium research report on Lululemon takes a look at other risks facing the yoga apparel-maker.

If imitation is the sincerest form of flattery, Lululemon's cheeks must be getting pretty rosy. It may come as little surprise that Lululemon's huge profit margins have attracted the attention of its competitors. That rising threat appears to be the biggest risk facing the company today as a numbers of rivals are targeting the women's athletic apparel market, most notably Gap's Athleta brand. Gap originally purchased the single California store in 2008, and locations have since been sprouting up suspiciously close to Lululemons. Thirteen of Athleta's 28 stores are located within a mile of a Lululemon, and the chain is now expanding quickly with five more expected this fall. Athleta also employs a similar store design, and its marketing tactics bear much in common with Lululemon, offering free yoga classes to the public and using advertising designed to evoke a similar sense of self-empowerment. Athleta has also been accused of stealing ambassadors from the more-established chain. Perhaps the most crucial difference is that Athleta's clothes tend to cost around 20% less than Lululemon's.

The Gap is far from Lululemon's only imitator, though. Nordstrom's Zella line was recently introduced to target the yoga market, and Nike has rolled out its own Salvation stores, also aimed at athletic women. Young-adult retailers like H&M and Forever 21 are also getting into the mix.

The competition seemed to reach a fever pitch when Lululemon sued Calvin Klein for infringing on patents related to its Astro pant. Lululemon may be pushing the envelope in this instance, as patents on design are rarely used in fashion, but a victory would help protect the brand and discourage copycatting.

Related to the increasing competition, Lululemon's valuation is another risk investors need to be aware of. With analysts expecting growth around 30% per year over the next five years, high expectations are already baked into the stock. If growth begins to taper off, shareholders should expect to see the stock pull back from its current valuation. The company has maintained exceptionally high same-store sales increases in the past and will need to continue to do so to justify the current price. Still, shares have fluctuated considerably in the past and have always rebounded, so one disappointing earnings update or a dip in the stock is not necessarily reasons for investors to run.

For further insight on the yoga star, I encourage to pick up a copy of the full report, which features in-depth analysis on the company's opportunities and reasons to buy and sell the stock. As a free bonus, the report comes with a year's worth of updates to keep you in the know on earnings reports and other breaking news. To get started with this exclusive new package now, all you have to do is click right here.

The article What to Watch Out For With Lululemon originally appeared on Fool.com.

Jeremy Bowman and The Motley Fool own shares of Nike. Motley Fool newsletter services recommend lululemon athletica and Nike. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Originally published