An Apparel Company Growing Faster Than Under Armour

If you invested in Lululemon  three years ago, you would have gained 228.8%. When extraordinary gains like this take place, investors often wonder if the upward momentum will continue or if they missed the boat. Instead of worrying about whether or not the stock will continue to appreciate, look at the underlying fundamentals of the company in order to determine if it's likely to be a quality long-term investment.  

Impressive performance
Lululemon CEO Christine Day has established a goal-setting culture based on the belief that personal goals and achievements transfer over to professional life. This has led to company employees setting and achieving goals they might not have thought possible before working for Lululemon. This, in turn, helps fuel a positive atmosphere which then leads to increased production.

As a company, Lululemon aimed to increase revenue by 30% in 2012. It exceeded that goal, increasing revenue by 37%. It also registered $2,058 in sales per square foot -- the highest of any retail apparel company in North America.  

Despite the infamous black luon recall back in March of this year, Lululemon has continued to grow its top line. In the second quarter, revenue jumped 22% year over year and comps improved 8% on a constant-dollar basis.

Looking ahead, Lululemon expects fiscal year 2013 revenue of $1.625 billion-$1.635 billion and diluted earnings per share of $1.94-$1.97, versus revenue of $1.37 billion and diluted EPS of $1.85 in FY 2012. Additionally, Canaccord recently raised Lululemon's price target to $90 from $85, citing supply chain improvements that are ahead of schedule, which has led to better product flow.

Christine Day attributes the company's success to superior products, strategic store locations, an inviting store environment, and a distinctive corporate culture. A growing e-commerce business, international expansion, and new stores being opened in North America could all provide future growth. However, potential headwinds do exist. 

Say goodnight to Day
Christine Day will be stepping down once the board finds a replacement. According to Day, she will be stepping down for personal reasons. No one knows what really took place behind the scenes. Whatever the case may be, Lululemon no longer has a leader who drove the company to phenomenal success after also being an executive at Starbucks. This might leave Lululemon without the leadership and direction it needs to thrive. 

Lululemon vs. Under Armour
Lululemon has opted to enter the men's athletic apparel market. Lululemon's high-quality moisture-wicking apparel, which is said to last for five years of full use, is a positive. However, when it comes to brand recognition Lululemon is associated with women and yoga. A big reason for Lululemon's success relates to its close-knit relationship with the yoga community. Entering the highly competitive men's athletic apparel market could be risky.     

Under Armour also offers moisture-wicking apparel as well as many other forms of apparel. The brand has become popular enough that some retailers are even willing to reduce Nike shelf space to make room for Under Armour. While Under Armour still doesn't have near the brand strength of Nike, this is a sign that Under Armour has officially arrived. It might be very difficult for Lululemon to compete with Under Armour in this arena. Keep in mind that Lululemon is well-positioned in a niche market (yoga). When it comes to men's apparel, it doesn't dominate a niche.

When you compare Under Armour to almost any other apparel company on the top and bottom lines over the past several years for growth, Under Armour wins. However, Lululemon has been even more impressive. 

Top line:

LULU Revenue TTM Chart

LULU Revenue TTM data by YCharts

Bottom line:

LULU EPS Diluted TTM Chart

LULU EPS Diluted TTM data by YCharts

The big difference is that Under Armour's CEO, Kevin Plank, isn't going anywhere. He has Nike in his sights, and he's not going to quit until he drives Under Armour to become the market leader. 

Neither Lululemon or Under Armour pay dividends. If you're looking for a dividend play in the apparel space, consider Columbia Sportswear . Columbia Sportswear has underperformed Lululemon and Under Armour on the top and bottom lines recently. It does have a pristine balance sheet with $430.61 million in cash and no debt, and it yields 1.20%. Top-line growth for Columbia Sportswear isn't out of the question. In 2012, it established a partnership with Swire Resources in order to expand its brand in China, and it recently signed a distribution agreement with Chogori India Retail in India (32 stores in 14 cities). This is in addition to the company's presence in 100 countries.

The bottom line
Lululemon is a growing brand with domestic, international, and e-commerce potential. On the other hand, the entry into the men's apparel market could be risky. More importantly, it's unknown if the company will be capable of maintaining its current growth pace with a new CEO. It's simply a high risk/high reward investment. Under Armour might not be growing at the same pace, but it should offer more stability.

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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. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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