There’s Reason For Concern Over Lulu’s Fashion Lounge Holdings, Inc.’s (NASDAQ:LVLU) Massive 26% Price Jump

Lulu’s Fashion Lounge Holdings, Inc. (NASDAQ:LVLU) shareholders are no doubt pleased to see that the share price has bounced 26% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 26% in the last twelve months.

Although its price has surged higher, there still wouldn’t be many who think Lulu’s Fashion Lounge Holdings’ price-to-sales (or “P/S”) ratio of 0.2x is worth a mention when the median P/S in the United States’ Specialty Retail industry is similar at about 0.4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Lulu’s Fashion Lounge Holdings

What Does Lulu’s Fashion Lounge Holdings’ P/S Mean For Shareholders?

Lulu’s Fashion Lounge Holdings hasn’t been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. You’d really hope so, otherwise you’re paying a relatively elevated price for a company with this sort of growth profile.

Keen to find out how analysts think Lulu’s Fashion Lounge Holdings’ future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The P/S Ratio?

There’s an inherent assumption that a company should be matching the industry for P/S ratios like Lulu’s Fashion Lounge Holdings’ to be considered reasonable.

Retrospectively, the last year delivered a frustrating 17% decrease to the company’s top line. Regardless, revenue has managed to lift by a handy 16% in aggregate from three years ago, thanks to the earlier period of growth. Although it’s been a bumpy ride, it’s still fair to say the revenue growth recently has been mostly respectable for the company.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 0.7% as estimated by the four analysts watching the company. Meanwhile, the broader industry is forecast to expand by 3.8%, which paints a poor picture.

With this in consideration, we think it doesn’t make sense that Lulu’s Fashion Lounge Holdings’ P/S is closely matching its industry peers. It seems most investors are hoping for a turnaround in the company’s business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh on the share price eventually.

The Key Takeaway

Its shares have lifted substantially and now Lulu’s Fashion Lounge Holdings’ P/S is back within range of the industry median. We’d say the price-to-sales ratio’s power isn’t primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

While Lulu’s Fashion Lounge Holdings’ P/S isn’t anything out of the ordinary for companies in the industry, we didn’t expect it given forecasts of revenue decline. When we see a gloomy outlook like this, our immediate thoughts are that the share price is at risk of declining, negatively impacting P/S. If the declining revenues were to materialize in the form of a declining share price, shareholders will be feeling the pinch.

You should always think about risks. Case in point, we’ve spotted 4 warning signs for Lulu’s Fashion Lounge Holdings you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.