Is this Stock a Downward Dog?

Diane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Around this time of year, gyms all around the globe are packed with passionate individuals bent on keeping the top New Year’s resolutions of losing weight and getting in shape.

Gym rats shudder at the increased club traffic, parking problems, and lack of gym etiquette. But among those who enjoy the robust enthusiasm from these eager beavers are retailers who cater to these fervent guys and gals who clamor for the latest items to help them in their quest to slim down and shape up.

Looking around my gym I have noticed members looking a lot spiffier. Gone are the ripped, baggy sweats, faded T-shirts that pay homage to old rock bands and the basic and boring gray and black. These have been replaced with "matching outfits" in bright hues that are blushingly form fitting and eye-catching on many. People now aren’t just trading workout tips; they are also sharing workout style tips. And since its long been know that the gym is a great pick-up place, looking good while working out is a top priority for many.

Ask the most stylish of the bunch where they got thier cute running top, chi-chi shorts, or fabulous yoga pants, and these fashionisats are apt to tell you they got their workout outfit from Lululemon (NASDAQ: LULU).  This upscale retailer of yoga and active gear has garnered a loyal following of mostly high-income, trendy women who are seemingly not affected by pricey prices or an economic downturn, evident during 2008 when Lululemon enjoyed strong sales growth despite an anemic economy.

The Canadian company has also reaped rewards from branching out since its inception in 1998, adding men’s wear, stores, and an online site. Lululemon also added a cache of in-vogue accessories. Female customers take delight in carrying around the store’s signature bags purchases come in.

The company went public July 26, 2007, in an offering of 18.2 million shares priced at $18 a share, well above the expected price range of $10 to $12 a share. Since then shares have soared, gaining more than 400%, hitting a high of $81.06. But over the last several weeks, Lululemon stock looks a lot like a lemon, down nearly 15% from its peak, and now trades closer to its 52-week low rather than its high. 

The lunge, or plunge, has many questioning if shares are a "Buy," or if investors should just say bye bye. Sporting a P/E of 42.09, shares look cheaper than a lot of its expensive store offerings, but the ratio is high, and compared to competitors, Lululemon’s stock looks questionably lofty.

Rival Nike (NYSE: NKE) is the “god of victory” of athletic shoes and apparel. Its brand name alone is valued at a whopping $10.7 billion, making it the most valuable brand among sport businesses. Its Oregon-based headquarters is in itself an empire. Nike’s iconic “swoosh” logo, “Just Do It” motto, sponsorship of elite athletes, and team apparel have helped the company grow into a $48 billion-plus revered behemoth.  

Also giving Lululemon a run for the money is Under Armor (NYSE: UA).  The Baltimore-based athletic apparel maker just posted healthy Q4 results that spiked 51% from the same quarter a year ago. Gains came from all segments. The company guided higher for all of 2013, projecting gains up some 20%-21%.

Meanwhile, Lululemon has not shown much growth in capital returns over the last three years, with profit margins remaining flat over the same period. Revenue and growth rates have fallen precipitously since fiscal 2010. Growth estimates for the next two fiscal years also point downward.

So it looks like Lululemon is posed—er—poised for a rough couple quarters.

When life gives you lemons, the enterprising lot makes lemonade. But LULU's management has not yet addressed how it plans to the right the slide. As a result, shareholders may well remain thirsty for growth in the near future.

DianeAlter has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica, Nike, and Under Armour. The Motley Fool owns shares of Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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