At Lululemon, Skip the $100 Yoga Pants and Buy the Whole Store

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lululemon earningsI tried to tap into my inner Peter Lynch earlier this year at Miami's Aventura Mall. Just as Lynch would drum up some of his best consumer-facing stock ideas by taking his wife and kids to the mall, I asked my wife to check out the recently opened lululemon athletica (LULU) store.

"You'll disappoint me if you come back empty-handed," I said.

Alas, she couldn't bring herself to pay nearly $100 for a pair of yoga pants. Thankfully for Lululemon investors, there are a lot more people out there who aren't like my wife.

Designer Sweats, Soaring Sales

The upscale retailer of fashionable fitness apparel came through with another monster quarter this morning.

Net revenue soared 39% to $212.3 million, backed by strong consumer-direct sales, brisk expansion, and a stunning 20% spike in comparable-store sales. Earnings grew even faster, climbing 76% to $38.4 million as margins widened and the Canadian chain decided against repatriating unremitted profits.

This kind of blowout quarter has been typical for Lululemon over the past two years. Can you ever picture Gap (GPS) posting this kind of growth? Without a time machine to get you back to its heyday in the 1990s, forget about it!

Remember When the Gap Was Great?

Gap was a growth darling a little more than a decade ago. Mall shoppers would flock to its inviting stores for denim and khakis. Unfortunately, Gap's focus on clothing basics made it easy to emulate.

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Gap has struggled in recent years as cheap chic discounters Target (TGT) and Kohl's (KSS) cash in by selling their own basic apparel at even lower prices. Gap also owns Old Navy and Banana Republic, but those chains have also had their share of hiccups over the years.

It's not that Gap isn't trying. Its first franchised store in Serbia opened today. Unfortunately the fundamentals just aren't there anymore. Analysts predict that Gap's profitability will fall by 22% this year on flat sales growth.

Lulu Is No Lemon

Shares of Lululemon fell after its quarterly report, largely because the company sees its juicy margins contracting between its previous quarter and its current one. This could pose problems for a chain selling high-priced workout clothing, but at the end of the day, Lululemon is still expected to grow at a healthier clip than most of its ho-hum mall neighbors.

Like its yoga pants, the 147-unit retailer's stock isn't cheap. Its shares trade for nearly 50 times what lululemon expects to earn this year. However, investors expect to pay a premium for a company that continues to generate market-thumping growth and double-digit comps. Until that changes, I'll have to discredit my wife's empty-handed field research. Besides, she hasn't hit up a Gap in ages.

I'll stick with Lululemon.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Gap and lululemon athletica. Motley Fool newsletter services have recommended buying shares of lululemon athletica.

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