Can Lululemon Keep Proving the Skeptics Wrong?

Selling high-priced yoga pants has been big business for Lululemon. In the second quarter, the athletic apparel market and retailer posted a nearly 50 percent jump in net income, boosted by higher sales and a favorable tax adjustment. The company also raised its full-year forecasts.


“We feel really good about where we are in the market now and very confident in our sales plan so and very confident in our product and the reaction,” CEO Christine Day told CNBC this week.

Lululemon doesn’t spend on advertising, yet its e-commerce growth is running near 90%, Day said. “It’s driven by product, it’s driven by a relationship in the stores, so it’s all organic growth.”

But that hasn’t been enough to satisfy many of the skeptics. David Einhorn is said to be short the stock, which is trading at a lofty 50 times earnings. For comparison, Nike is trading on only 20 times while Under Armour is even more expensive at 58 times. High-end retailer Nordstrom trades at 17 times.

“I think valuing the company is the market's job and my job is actually creating value and I think we have a healthy balance sheet, one of the top business models in retail while delivering phenomenal growth,” Day said of the rumors. “I think our story is very intact.”

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Thomas Stemberg, the co-founder of Staples and now a general partner at private equity firm Highland Consumer Fund, noted: “Nobody's made any money shorting Lululemon over time and the 20 percent of the stock that's held by shorts are people who have to cover at some point in time creating further upward pressure on the stock.”

Jim Cramer is also a Lululemon bull.

According to Cramer, the company has a huge proprietary edge. Its yoga pants use the latest technology, which allows Lululemon to charge around $100 for a single pair. Demand for its products doesn’t seem likely to fall anytime soon, Cramer said.

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Day underscored the reason for its edge this week. “We're in a fortunate position to be able to continue to invest in our product,” she said. “The way we do our margins and vertical integrated retail give us a competitive advantage to invest at levels the more price conscious brands can't do.”

Cramer believes Lululemon is a good long-term story. “This is not a fad — it’s a trend — and I think you’ll be able to ride it for a long time as long as you get in at a good entry point,” Cramer said. “Beware: the short-sellers hate this company and are constantly saying it is slowing down, to which I say, everyone else in the industry would pray for such a slowdown.”