Chip Wilson, founder of yoga-wear maker Lululemon, sold almost $50 million worth of stock in January, SEC documents show.
John Hempton says he thought it was crass when Lululemon Athletica Inc. (TSX: T.LLL, Stock Forum) (NASDAQ: LULU, Stock Forum) was recently described as a gambit on female vanity.
But in a January 30 report, the Bronte Capital blogger said he couldn’t think of a better explanation for the soaring stock price, which hit a 52-week high of $64.85 this week, giving the company a market cap of $9.1 billion, based on 143.5 million shares outstanding.
We aren’t being sexist here. It’s just that Lululemon is, after all, a designer and retailer of technical athletic apparel for yoga and other sweaty pursuits. Not all of its customers are women, but we see few men shopping at the outlets.
After jumping from $47.50 in early January, Bronte said Lululemon stock is priced at 10 times sales.
“That is amazing for a fashion company,’’ he writes.
“Nike Inc. (NYSE: NKE, Stock Forum), by comparison, has a market cap of $46 billion and a price to sales ratio of just over 2,’’ he observed. “Even Apple Inc. (NASDAQ: AAPL, Stock Forum) was never as richly valued as Lululemon,” said Hempton, who now wonders if, even as a play on female vanity, the stock has become overpriced.
Bronte Capital is an Australian and U.S.-licensed global fund manager. As a blogger, Hempton is known for outlining the reasons for going short on a given stock.
In this case, he isn’t saying that Lululemon is a screaming sell. Rapid growth can justify extreme price-to-sales multiples.
However, he thinks that after the recent rally, investors would be well advised to ask some of the following questions:
- What is the value of the end market for yoga and running clothes?
- Can you explain the stock price in terms other than as an investment (largely?) in female vanity?
- What, if anything, keeps the competition out of yoga clothes?
Given that company founder Chip Wilson sold almost $50 million worth of stock last month at prices ranging from $51.18 to $63.67, we wonder if Wilson has also been asking himself some of the same questions.
In early January, Wilson said he planned to resign as the company’s chief innovation and branding officer (effective January 29), but would remain Chairman of the board of directors. He still owns 9.1% of the company.
Perhaps he just decided it was time to take profits off the yoga mat.
But recent stock sales hardly seem like a ringing endorsement of a company that was founded in 1998, and has expanded rapidly from its original shop and production factory in Vancouver.
As of October 30, 2011, the company’s branded apparel was being sold via on-line channels and through 165 stores in Canada, the U.S. and Australia.
After raising its earnings guidance on January 10, 2012, Lululemon said it expects to report diluted earnings per share of 47 cents to 49 cents for the fourth quarter of fiscal 2011, ending January 29, 2012, on revenue of between $358 million to $363 million. That compares to an earlier forecast of 40 cents to 42 cents a share on net revenue of between $327 million and $332 million.
According to Bloomberg News Service, there are currently 23 analysts who follow of stock. That includes 13 with a buy rating, 9 with a hold and one with a sell.
Stockhouse blogger bellmetal said that in his view, the stock has outpaced value.
“What’s the upside on this stock, beside the ra ra on the website,’’ he writes. “I find the market capitalization of this stock to be surprising to say the least,’’ he writes. “This looks like an outstanding short, especially in the current market environment.’’
Eric Alexander, an associate analyst with Stifel Nicolaus & Co Inc. in Denver, Col., said the stock has been driven higher in recent weeks by the company’s revised same store sales forecasts. They are now expected to be 22% to 25% higher in the fourth quarter, up from the previous estimate of 13% to 15%.
In a phone interview with Stockhouse, Alexander said investors could take profits off the table before the company releases its fiscal 2013 financial forecasts at the end of March. “I wouldn’t be surprised to see the stock pull back to the $58 to $60 level,’’ he said.
For his part, Hempton says he has no position at this time. “Shorting female vanity is not something I have ever done successfully – and I sure as hell would not want to be long on this,” he writes.
“Besides the entire “it is overpriced argument” applied 50 per cent down from here,’’ he said.
Still, Hempton says he would really like to know what the big institutional holders are thinking. “Maybe their butt looks fantastic [in yoga apparel], but their brains look a little suspect.’’