The Next Hottest Store at the Mall?

I was at the local mall last week and where there was once a vacant sign stood a new and vibrant looking clothing store called Lululemon Athletica (NASDAQ: LULU).  As soon as I walked by I was intrigued but the store wasn’t quite finished so I couldn’t go and explore.  After returning home I began to research and found some very interesting things.  You may want to do some research yourself on top of reading this article but here is what I found: the company itself seems to be headed for fantastic success, and yet the stock is already priced so high because of that I needed to dig deeper before making any decisions myself.

The main question, and one that “value” investors must grapple with quite frequently, is how much they are willing to pay for the current growth. The trailing P/E ratio is – pretty ridiculous no matter which way you look at it.  When you look at the forward P/E, based on estimates, it is 37, which is still higher than I usually like, but much more reasonable for a rapidly growing company.  The quarterly earnings growth has been around 35% and typically I like to see growth and P/E hovering around the same number so that looks even better.  Earnings per share, which I always think is a valuable metric when looked at over time, has gone up in accordance with the stock price in recent years so that again is a solid sign.  Another plus is that the company has no shadow of debt hanging over it to suck up future assets.

Their historical profit margin is amazing and has been around 20% for the last few quarters. Compare this to an industry average around 5%. This is impressive but it is questionable if that is sustainable. It is obvious that the reason they have such a high margin is because of high prices and as competitors, such as Gap (NYSE: GPS) with their new Athleta brand, gain in popularity it may carve into Lululemon’s profits.  Their male side has not seen nearly the growth of their female lines, mainly due to the popularity of brands such as Under Armour (NYSE:UA) which are solidly entrenched in the male sport and athletic clothing arena.

The numbers always have their own story to tell and it is one that you must listen to, but with potential huge success stories you can never get buried in the numbers, you need to look at the bigger picture. Lululemon Athletica is a brand name that has a lot of respect because of their quality.  The stock has exploded since they went public in 2007 but in my opinion they still have a lot of room to grow and here is why.  Though they compete with companies like Gap and Under Armour, they run the majority of their stores in typical malls, and so it is valid to compare them to other mall retailers.  LULU has 180 stores in the US and Canada compared to 450 for Hollister and 350 for Abercrombie and Fitch (NYSE: ANF).  They have a large potential market along the west coast and the southern US and their online sales are a large and growing component of their total.  Don’t forget about international expansion potential.  So there is room for growth but even beyond that the company has something beyond just a brand name, they sell a lifestyle and the lifestyle they sell is extremely popular with their customer base.  This gives them a good deal of protection against companies such as Nike (NYSE: NKE) who may have a larger store base, more selection, and an established name.  So while Wall Street may be enthusiastic about this company there is still reason to be excited.

If you have any yoga pant wearing friends ask them if they have heard of Lululemon and what their experience with them has been like.  That’s one of the best insider views you can get.  Beyond that, find one near you and check the store out for yourself or take a look at their website.  When it comes down to it I cannot pay this much for the company right now, but the possible growth still makes it enticing and I will surely have it on my watchlist.  Wall Street does some foolish (lowercase F) things and if it decides to bring this stock price down I might have to jump on.  I see a lot of potential in the underlying company.


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