It will be interesting to see if the spiral that yogawear retailer Lululemon Athletica has found itself in over the last year is one that can be arrested. Companies rise and fall often in this world, but the U.S. stock market’s history is littered with retailers that went into a tailspin after series of missteps that turn once-interesting investments into a veritable death trap for investors, and result in the kind of drop that benefits mostly short-sellers, late-night comedians and eventually restructuring lawyers.
It’s particularly rough for companies that inspire cult-like followings, be they as a stock or as a retail purchase, as markets eventually become saturated, competitors jump into the fray, and investors go forth and look for the next big thing to occupy their time. And a stock like Lululemon, which quintupled between late 2010 and early 2012, is kind of the definition of a cult stock. That’s well and good when earnings keep going, which kept the stock price in a range (albeit elevated) through December 2013, but those days are over.
Coming into the morning, investors were betting on a 9 percent move in the stock by the end of the week in one direction or another, and it turns out they may have undershot that expectation in terms of volatility, as the stock is down 14 percent after results that clearly came out disappointing and don’t point to the kind of turnaround that the bulls on the company had hoped for (not that there are a heck of a lot of those right now – as of yesterday about 80 percent of the shares that could have possibly been used for short bets were being borrowed for such a purpose, according to Markit). With the stock cut in half in the last year and more expected, the bearish bets on the company are likely to pick up.
Lululemon’s realized volatility over the last 30 days sits at about 23 percent, with expected 30-day volatility at about 53 percent according to iVolatility.com, so investors had been anticipating more action, but even with this decline, StarMine’s intrinsic value on the stock is still lower, at about $29.95 a share, modeling 8 percent annual growth over the next 10 years, compared with growth of about 12 percent or so expected by investors for that period of time.
As investors have seen with the likes of Aeropostale, Abercrombie & Fitch, and even larger department stores like J.C. Penney, once a brand has a certain level of stink on it, it’s not something that easily washes off. Lululemon certainly has a smell to it – and not the yummy Canadian bacon kind – thanks to the Vancouver-based retailer’s founder Chip Wilson saying a year ago that “some women’s bodies just actually don’t work” for Lulu’s pants after it had to recall its yoga pants for being more-or-less see-through. Add to that supply chain issues and it’s not the happiest of pictures: coming into the day, StarMine shows its enterprise value-to-revenue ratio at about 3, compared with competitors like Gap and VF Corp, which sport better ratios on that front. Again, it still points to a lot in terms of expected growth that may be difficult.
“As we move into 2014, we are reflecting on our learnings with humility, and are entirely focused on our future,” Chief Executive Laurent Potdevin said in a statement. Investors are thinking about that future, too.