“Quite frankly, some women’s bodies just actually don’t work” for pants. “It’s really about the rubbing through the thighs, how much pressure is there.”
That’s what Chip Wilson, the founder of Lululemon said when he started to receive complaints that its new line of yoga pants were sheer. Needless to say, Lululemon lost about a third of its market value shortly afterwards, Wilson was forced to step down as chairman and $67 million in revenue of faulty pants were recalled, Chief executive Christine Day resigned and Luluemon started losing market share to the competition.
Fast forward a couple of years and the company is in great shape. Lululemon invested in their direct to consumer channel by making investments in digital marketing. This engagement has led to having the right product mix, at the right time and at the right location, which has allowed them to control inventory and drastically cut down on discounts. And when you put it all together, you have the online experience, driving traffic to the stores, where customers don’t have any problems paying $100 for women’s yoga pants.
So is the ride over for Lululemon or is it just getting started? Lets go to the charts.
After price dropped back into a monthly demand zone in June 2017 at $47, price broke resistance $82 and hasn’t looked back. Lululemon is up 80% so far this year and 130% over the past 12 months.
From a valuation standpoint, I’m going to use PEG which is the P/E Ratios divided by the Expected Earnings Growth Rates. The PEG ratio is used to determine a stock's value while taking the company's earnings growth into account and is considered to provide a more complete picture than the P/E ratio. A PEG < 1 is considered cheap and that the stock is trading at a discount.
Right now Lululemon trades at a 40 multiple and their forecasted EPS growth is at least 20% EPS growth this year, which equates to a PEG of 2. Thus, based on valuation and what the chart suggest, wait for price to pull back to the $100 level on the weekly chart before considering to go long.
NOTE: earnings is on Thurs. Expectations are high, so if they don’t knock it out of the park, price may pull back to the $100 level sooner than you think.
This post is my personal opinion. I’m not a financial advisor, this isn't financial advise. Do your own research before making investment decisions.
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by rollandthomas