Are You Cuckoo to Invest In Lululemon Athletica inc. (LULU)?

The only solution would be to run a massive advertising campaign to alter the company’s image, but that might increase costs too much, hurting the bottom line. And why would a man buy an $80 shirt from Lululemon when he can buy a similar shirt for half the price from Under Armour Inc (NYSE:UA)?

For all these reasons, stealing market share from Under Armour Inc (NYSE:UA) and NIKE, Inc. (NYSE:NKE) will prove extremely difficult for Lululemon.

Conclusion

The good news is that Lululemon’s numbers continue to impress. If you believe in ignoring all the noise and just focusing on the top and bottom lines, then you might want to consider Lululemon Athletica inc. (NASDAQ:LULU) as an investment. On the other hand, risks are now significant.

Lululemon is trading at 33 times earnings, which means expectations are high and there is little margin for error. Under Armour is also expensive at 50 times earnings, but the always-steady NIKE, Inc. (NYSE:NKE) is currently trading at 23 times earnings. In another plus for Nike, it’s the only company in this group that offers a dividend yield — currently 1.40%.

Other negatives for Lululemon include downside stock momentum, a sudden and unexpected CEO departure, plans to open stores for men only (high risk), fierce competition, and insider trading speculation.

The most important point is Day’s departure. When a top-notch leader with proven results exits a company, it rarely leads to improved results down the road. These kinds of leaders are difficult to find, and they’re nearly impossible to replace.

Consider avoiding Lululemon at this time. Nike is the best and safest long-term option in the group.

The article Are You Cuckoo to Invest In LULU? originally appeared on Fool.com and is written by Dan Moskowitz.

Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica, Nike, and Under Armour. The Motley Fool owns shares of Nike and Under Armour. Dan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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