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Is Lululemon Getting Ready to Run Like Under Armour?

Just a few days ago, lululemon athletica  (NASDAQ: LULU  ) investors were squirming uncomfortably after shares of the yoga apparel specialist dropped more than 5% after the company issued weaker-than-expected forward guidance.

To be sure, some of that pessimism was understandable considering Lululemon said it expects weakness from its recent see-through pants debacle to persist through the remainder of the year, despite the fact that the problem was technically resolved in June.

That all changed on Wednesday, however, when the stock rose more than 5% after analysts at Cannacord Genuity likened its current position to that of Under Armour  (NYSE: UA  ) a year ago, saying Lululemon's weakness should prove temporary and leave it poised to bounce back.

But, wait, didn't I say almost the exact same thing about Lululemon just last week?

Well, yes... sort of. That was when I reminded you of management's assertion that its current pain should only persevere over the short term. At the same time, I noted even after the negative effects of its pants recall, Lululemon's gross and operating margins still remain higher than those achieved by both Under Armour and Nike  (NYSE: NKE  ) .

That said, the folks at Cannacord do bring up a great point by extending the Under Armour comparison even further.

Last October, Under Armour was not only working through its own bout with management turnover -- just as Lululemon is currently searching for a new CEO -- but Under Armour also seemed to be struggling to compete with footwear industry stalwart Nike with its budding aspirations as a power player in the athletic shoe space.

As a longtime Under Armour shareholder myself, I can attest to the fact it was ridiculously tempting to sell after watching my shares drop more than 20% over the course of less than three months from the middle of last October to early January. 

But wouldn't you know it, the Foolish long-term investor in me ultimately won out as I held tight to my position -- even buying more shares of Under Armour back in April -- as I remained convinced its problems wouldn't last forever.

Those of you keeping track of know Under Armour stock has rebounded with a vengeance from last year's weakness, returning more than 67% from its low in January thanks to a string of solid earnings reports since then. Needless to say, the short-term pain was more than worth it for those who bought during the temporary drop:

UA Total Return Price Chart

UA Total Return Price data by YCharts.

What's more, as I also pointed out last week, while Lululemon stock might appear relatively expensive trading at around 40 times last year's earnings, it's worth noting the market has put a significantly higher premium on Under Armour's shares. In fact, that gap has grown increasingly apparent over the past year:

LULU PE Ratio TTM Chart

LULU P/E Ratio TTM data by YCharts.

Of course, Under Armour's net income per share also happened to nearly triple last quarter from the same year-ago period, far outpacing its respectable 23% revenue growth. Lululemon, by contrast, remains right in the thick of its troubles as investors watched net income actually fall 1.2% last quarter despite a revenue increase of 22%.

But if Cannacord's right -- and it's no mystery that I think they are -- when Lululemon eventually returns to business as usual and net income begins to rise again along with sales, it's safe to say patient, long-term investors should be handsomely rewarded as the stock follows suit.

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9/28/2016 4:00 PM
LULU $63.51 Down -1.01 +0.00%
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