David Trainer and Maury Brown debate Lululemon's valuation on CNBC's Closing Bell. Trainer predicted a 20% stock drop ahead of earnings, citing concerns about the company's pricing power and adjusted profitability amid growing competition in athleisure.
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Lululemon stock is trading higher, up almost 4% today ahead of its earnings that are coming out after the bell. You'll be dealing with that tonight. Joining us to debate whether it has more room to run, Maury Brown from Wedbush Securities and David Trainer from New Constructs. So, Maury, you're the bull, but this is a stock that has suffered for a while. Why do you like it here? Just on a valuation basis or what?
Well, no, I think our, our, you know, our long thesis for Lulu starts with pricing power. I mean, we've seen them over the last 12 to 18 months, you know, be able to raise, raise prices, you know, across multiple categories in their store while others are really struggling to, to achieve pricing power. Instead, they're having to discount to move product. We think that speaks to, you know, the brand resonance with consumers. So going forward, you know, we're looking for them to continue to expand and expand their business domestically. You know, we believe in their targets for 2020 of getting to $4 billion in revenue, doubling the revenue base. We think there's a substantial margin opportunity. So we feel good about the long-term trajectory. Certainly first quarter, you know, trends to date across retail have been a little challenging. But I think, you know, that aside, we feel very good about where the brand is positioned going forward.
All right, David, you feel very differently. Why?
We think a lot of profit growth is already baked into the stock. So there's more risk there than people may realize. They're overstating their profits a little bit. A robo-analyst technology pointed out that they understated taxes by about $20 million. They got about $440 million more on the balance sheet. So the business is not as profitable as people think, but it's also a crowded space. I mean, at the end of the day, what are the barriers to entry for yoga pants? It's spandex. It's been around for a long time. I don't know how long the first mover advantage and the brand awareness that they've successfully created will persist in the form of strong margins and profits. I just don't think it's a long-term story. I don't know how much of a moat you can build around spandex.
And, Maury, address what he's saying there and put it in the context of the whole category of athleisure. When you consider the Under Armour and the Nikes and some of the other competitors in that category, do you like them as well, or is Lulu for you a special situation?
Sure. I mean, I would say there's no shortage of competition, right? You certainly have the well-capitalized players, the Nikes, the Under Armour, the Adidas. You also have the on-mall competition, which I view as, you know, sort of less innovative and more sort of me-too product that has really had to move their product through discounting. You know, I think Lulu competes well with, with the large wholesalers, Nike and Under Armour. I think they've got a little bit of a unique niche given that they are vertically integrated. So they get to entirely control their customer experience. You know, certainly Nike and Under Armour are a little bit at the mercy of their retail partners. So I think that makes them a little bit unique. I feel like they've been able to withstand, you know, tons of competition coming in the last couple of years. And again, it has not held back their same-store sales and it has not held back their ability to raise prices over the last 12 to 18 months.
Yeah, David, kind of the same question to you. Would you avoid the whole quote-unquote athleisure or sportswear space now then?
I think a lot of these stocks have been overheated. I mean, I think not too long ago you guys asked me to compare Nike and Under Armour and Sort of a similar situation here with Lulu and like a Skechers. You know, at the time Under Armour had hugely high valuation. Nike just had less risk. And there are a lot of stocks out there with less risk. I think that now that athleisure is hot, you're going to see more capital poured into the space from the Nikes and the Under Armour. They don't have to spend money taking risk in new spaces until they know that they're going to be solid. And vertical integration could be a real hamstring for profit growth because there's a lot of capital built in all these stores that Nike and Under Armour don't have to worry about. They can focus on creating product and distribution without all the capital that goes into inventory on shelves and stores and all those things.
All right.
Good stuff.
Maury, David, thank you both. Appreciate your thoughts.
And thank you.
You will have those numbers from Lululemon coming up in just a couple of minutes here.
