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Short-sellers love to hate lululemon athletica (NASDAQ: LULU ) . However, the Canadian company continues to prove its critics wrong despite recent product recalls and quality-control issues. In fact, Lululemon stock is up more than 18% in the past quarter. So is it ready for a pullback? Let's take a closer look and uncover whether this stock is still a good play for short-sellers today.
The luxury athletic apparel company has rebounded nicely from a PR nightmare in March, in which Lululemon was forced to recall more than 17% of its signature luon pants from store shelves. At the time, quality-control issues related to the retailer's recall sent short-sellers into overdrive. In fact, the number of Lululemon shares sold short during the last two weeks of March ballooned by as much as one-fifth, according to Yahoo!
Nevertheless, the stock has made a solid comeback since then, with shares hitting a fresh 52-week high of $82 earlier this month. While some of the shorts retreated, the stock's short interest of more than 17% is still high. For comparison, Nike (NYSE: NKE ) , one of Lululemon's biggest competitors, has a short interest below 1%, in large part because Nike trades at a much more reasonable valuation than Lululemon.
With the S&P 500 boasting a P/E ratio of 17 and Nike's price-to-earnings of 25, it's hard to justify buying Lululemon's stock at around 43 times earnings. Of course, this metric doesn't paint the whole picture. It's worth noting that Lulu commands a loyal customer following, strong revenue growth, and some of the best margins in the industry. While I don't plan on buying more shares here, I also wouldn't dare short the stock.
The short of it
Lululemon faces competitive threats from some deep-pocketed rivals, including Nike, Under Armour, and Gap. The competition could hurt Lulu's market share over the long run. However, if you were planning on betting against the company, I'd suppress those instincts for now.
The once-lofty expectations for this stock have been reined in, and the company seems to have a handle on its recent luon recall. Moreover, as the retailer's supply chain matures and quality-control issues are resolved, I suspect we'll see a stronger, more efficient Lululemon emerge.
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.