Everything seems to be going great at Lululemon Athletica. The company is on track for $9.6B in sales in fiscal 2024, up 18.5% compared to last year, while EPS is expected to nearly double to $12.41. The market has also rewarded LULU shareholders very generously. At $510 a share, the stock trades at a P/E of 41, which is quite expensive even for such a high grower.
The first time we wrote about Lululemon, in April of 2021, the stock was trading around $343. Elliott Wave analysis helped us to predict not only the run to over $485 later that year, but the following crash to just over $250, as well. Here is the chart that analysis was based on.
There was also nothing wrong with the company back then. The problem was that once the stock price approached the $500 mark, the five-wave impulse pattern that began in 2009 would be complete. According to the theory, a three-wave correction was supposed to follow and erase the entire wave V. And follow it did. By May, 2022, Lululemon was barely holding above the $250 mark, down 48% from its 2021 record.
And while we still thought $250 was too high a price for the stock, valuation-wise, Elliott Wave analysis was sending a bullish message already. The chart below, published on our website on May 26th, 2022, explains.
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An impulse pattern, labeled I-II-III-IV-V, followed by an almost complete A-B-C zigzag correction meant that the uptrend can be expected to resume soon. We thought that the stock might drop some more in the short term, but the bulls were eager to return. Over a year and a half later now, Lululemon is hovering at new all-time highs and nearly everyone is bullish again. We beg to differ once more for reasons very similar to those expressed in 2021.
Valuation doesn’t matter until it does. We already mentioned Lululemon ‘s extreme P/E ratio. The other part of the valuation equation is the fact that despite the company’s best efforts, its growth rate is likely to decelerate. The law of large numbers guarantees it. So instead of extrapolating the recent stock price surge into the future, we think a notable re-rating to the downside lies ahead.
In addition, the rally from ~$250 to over $510 can be seen as a three-wave sequence, labeled (w)-(x)-(y). This structure most likely means that the correction, which began in 2021, is still in progress as an A-B-C expanding flat. If that’s the case, another bearish reversal can soon trigger a 50%+ selloff in wave C. It can drag Lululemon below $250 and bring its P/E to a much more reasonable ~20.
Here is another important thing to consider: despite all the soft landing talks, the probability of a recession in 2024 has actually been increasing. Lululemon is a premium brand, which needs a healthy consumer and plenty of discretionary spending. When the going gets tough, though, a lot of people will think twice before splurging $100 on a pair of yoga pants.
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