lululemon: Why the Street Got It Wrong
This article is part of ourRising Star Portfolios series.
lululemon athletica (NAS: LULU) slightly tattered its tights yesterday, dropping 5% on third-quarter earnings results. The yoga-inspired retailer has grown to be the largest position in my real-money Rising Stars portfolio, so I'm naturally anxious to dig in and see whether there's any cause for concern.
Fellow Fool (and fellow lululemon shareholder) Evan Niu did a fabulous job breaking down the earnings report yesterday, so no need for me to repeat the deets. Instead, I want to look at the main points of my original investing thesis and see how things are progressing along those lines. Here are the four growth catalysts I listed in my original buy report.
1. Expansion beyond the company's core yoga base
Management doesn't normally break out sales by sport, so the last data point I have is that running apparel made up about 20% of revenue in the fourth quarter of last year. New running lines are being introduced, and there is also a focus on dance and gymnastics, so I'm pretty confident that things are going well here.
2. Expansion beyond women's wear
There was a brief (pun intended) mention of men's wear in the conference call, when CEO Christine Day said the line "has really done well" and is currently being revamped. She says we'll see new stuff by summer -- "the big popping stuff." Can't wait! Men's apparel now accounts for about 12% of sales, up from 10% in last year's fourth quarter.
3. International expansion
Management continues a measured rollout here, with logistical support being lined up for e-commerce sales to Europe and Asia; localized websites in Australia, Hong Kong, and the U.K.; and new showrooms slated to open in London and Hong Kong early next year.
4. Online sales
"Direct to consumer" revenue grew 71% from the same quarter last year, to $23.9 million. That's an increase from 8% of total revenues in the same period last year to 10.4% this quarter.
Just do it
lululemon seems to be executing beautifully overall, hitting well on all four catalysts. Ever-focused on the long term, I'm not worried about small earnings "misses" or "beats"; those things just don't move the needle over the long term. The reasons behind the performance are what matters, and the growth catalysts are what will turn this company into one of the world's great brands in the decades to come.
This table provides a good comparison with an existing great brand, and three companies chasing it.
Market Cap (Millions)
|Nike (NYS: NKE)||$44,164||$21,768||18||23%||10%|
|Gap (NYS: GPS)||$9,597||$14,630||12||28%||7%|
|Under Armour (NYS: UA)||$4,233||$1,371||38||17%||6%|
Data provided by S&P Capital IQ.
Nike is the clear market leader in athletic apparel and gives us a good idea of what can be achieved by smart marketing and efficient operations. With great growth, returns on equity, and margins, lululemon is on the right track -- and still under the radar for a lot of consumers.
The stock remains a "buy" for me, in both my personal account and my Rising Stars portfolio. To help you track my performance, I'm also making a CAPScall by giving lululemon a big, green thumbs-up in my CAPS account.
- Add lululemon athletica to My Watchlist.
- Add Under Armour to My Watchlist.
- Add Nike to My Watchlist.
- Add Gap to My Watchlist.
At the time this article was published Fool analyst Rex Moore hastweeted about his lululemon running shorts, as well as stocks appearing on his various screens. Of the companies mentioned here, he owns shares of lululemon athletica. The Motley Fool owns shares of Gap, Under Armour, and lululemon athletica.Motley Fool newsletter serviceshave recommended buying shares of Under Armour, Nike, and lululemon athletica and creating a diagonal call position in Nike. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.