3 Reasons Why Lululemon Isn't Apple

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

The Street has always had a habit of comparing two companies regardless of whether the companies are reasonably comparable or not. This time, Lululemon (NASDAQ: LULU) is being compared to Apple (NASDAQ: AAPL). Thanks to Apple’s historic rally, the general perception is that if a rapidly growing company’s CEO leaves abruptly, and its shares take a deep plunge, but then its shares will most likely bounce back. However, here are a couple of reasons that suggest that Lululemon won’t rebound like Apple.

Lofty valuations

First, Apple was exceeding the Street’s expectations back in 2011. It was innovating new products and was showing absolutely no signs of slowing down. Its shares were trading between a P/E of 12 and 20 throughout 2011, while its operating cash flows grew by 182% during the year. Naturally, if a rapidly growing company with tremendous growth prospects becomes cheaply available, pouncing on the stock makes sense.

However, Lululemon started showing signs of a slowdown back in January. The company had been reporting double-digit growth rate in its same stores sales for 13 straight quarters, which dropped to single digits during its Q4. Nevertheless Lululemon’s growth rate is still high for a mature business, and a slowdown is justified after its prolonged streak of impressive quarters.

But prior to its crash, shares of Lululemon were trading at lofty valuations -- with a P/E of 45 or more -- which seemed to be overblown by the Street’s high expectations. If a company is growing at a rapid rate, then the Street doesn’t mind paying a premium. But over the last three years, its operating cash flows have risen by just 14%, while its trailing P/E has been hovering over 35. A company that’s gradually slowing down clearly doesn’t deserve such lofty valuations.

The exit

It’s a well-known fact that Steve Jobs had to leave Apple due to his worsening health condition. But the CEO of Lululemon, Christine McCormick Day, left Lululemon due to personal reasons. Shortly after the announcement, Lululemon was downgraded by several investment research firms.

Without reading too much into her reasons, I believe that focusing on what happened during that week is of vital importance. Just two days before Lululemon announced the sudden exit of Christine Day, Chairman Dennis Wilson offloaded $50 million worth of his personal holdings in the company. According to Wall Street Journal, “The sales were made as part of a prearranged trading plan known as a 10b5-1, which lets executives buy or sell shares in their own company according to preset conditions even if they have inside information at the time of the sale that could affect the stock price."

According to the trading plan setup in December, Mr. Wilson was allowed to sell up to 5.7 million shares over a period of 18 months. And during 2013, he has offloaded around 2.3 million shares in several trades. But his $50 million sale was the largest among the lot. However, there is no way to ascertain if the sale was automatic or perfectly timed. According to David Yarmick, “The whole point of these plans is that if material events occur, as they inevitably will, the insider has an alibi against insider-trading accusations.”

But the bottom line still remains that Mr. Wilson was prepared to offload a massive chunk of his stake in the company. This highlights his faith and confidence in the company’s future growth trajectory.

Rising competition

Besides that, another commonality between Apple and Lululemon is that both companies had a road map planned out when their respective CEOs were departing. But that doesn’t mean Lululemon will come out victorious.

Apple is a top-notch premium and dominating manufacturer of consumer electronics and faces little competition for its premium offerings. However, Lululemon operates in the athletic apparel industry, where competition is increasing rapidly.

Athleta, Zobha, Calvin Klein and Under Armour (NYSE: UA) are some of the leading brands that are trying hard to dominate women’s sportswear. As a matter of fact, Under Armour has several lines of athletic clothing for women, which raked in $400 million in fiscal year 2012. The company recently inaugurated its first exclusively for women retail store since 2008, which will be used to showcase its athletic clothing line for women. The message is clear: Under Armour is targeting Lululemon’s market share.

Final words

There’s no denying that Lululemon is slowing down. Perhaps a new CEO is what Lululemon needs. But it takes time to turn things around, and it wouldn’t be wise to expect blockbuster results immediately. With that in mind, Lululemon not only has to find a worthy CEO, but also revive its growth momentum. Hence, Mr. Wilson saw fit to offload over 2.3 million of his shares. This kind of insider activity prompts me to ask its investors one important question: if Lululemon’s chairman is drawing down his stake in a slowing company, then why aren't you?

Lululemon has the potential to grow its sales by 10 times if it can penetrate its other markets like it has in Canada, but the competitive landscape is starting to increase. Can Lululemon fight off larger retailers and ultimately deliver huge profits for savvy investors? The Motley Fool answers these questions and more in its most in-depth Lululemon research available. Thousands have already claimed their own premium ticker coverage; gain instant access to your own by clicking here now.

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Piyush Arora has no position in any stocks mentioned. The Motley Fool recommends Apple, Lululemon Athletica, and Under Armour. The Motley Fool owns shares of Apple 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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