Six weeks ago we penned a critical piece called "Lululemon Is Set to Crash." We were primarily concerned about the valuation of the company at over $7 billion. Since that article was published the stock has declined over 16%. The question is whether there is more downside ahead?
Earnings are scheduled to be released on Friday and analysts are somewhat concerned.
Analyst Sarah Wasserman of Cincinnati-based Schaeffer’s Investment Research said, "It seems that Friday’s earnings report could be a crucial moment for the struggling stock.”
Other Wall Street analysts are concerned about the valuation which can only be justified by a flawless quarter.
“The stock appears priced for perfection, and we believe any glitch on earnings could result in a sell-off,” wrote analyst Liz Dunn of FBR Capital Markets in New York, who last week downgraded the stock to “underperform.” “We believe the market will punish anything other than a flawless quarter, given [Lululemon’s] valuation and recent run.”
Retail stocks such as Gap (GPS) have been crushed in recent months. Gap lost 17% in one day after reporting a 23% drop in first-quarter net income that was blamed on inflationary pressures.
Although the long-term bearish thesis still holds, there is nothing to suggest that sales have slowed in the first quarter.