Every year, investors watch companies run their course, and then either refresh themselves or fall. There are pages and pages written about companies that are boring, cheap, and will slowly go up for the rest of time -- or until the sun explodes and the Earth is devoured in a fiery wave. Then there are the refreshers. Gap fixes its brand and adds new lines. Starbucks acquires fresh blood from other companies and makes a new go of it. Yesterday, lululemon athletica (LULU 0.80%) proved that, for now, it's one of the survivors.
New locations, new growth
In the company's third-quarter press release, it forecast comparable-store sales increasing in the high single digits for the next quarter. That's a drop from the usual mid-teens growth that the company has put up. In the third quarter, for instance, it increased comparable-store sales by 18%. That fall back is one of the signs that a business has started to reach middle age. The problem companies often see is that they expand their business like some sort of demented mole, tunneling all over the world as quickly as possible -- think Starbucks in the early 2000s. People love the brand for a while, but soon grow tired of it. Comparable sales slide, and while the company continues to grow, it's pretty much tapped.
But in Lululemon's earnings call with investors, management highlighted that the slowdown in comparable sales was going to be more than offset by expansion in Asia and Europe, two relatively new worlds for the brand. The start comes next year, when Lululemon will begin the process of building up showrooms in places like London and Hong Kong, which will lead to more growth over the next two years.
That is excellent news for investors, who are looking for big growth to continue. Lululemon is trading at a P/E of almost 50, making it one of the highest-priced stocks in the apparel market. With its new expansion plan, the brand should be able to re-create some of the success it saw in the U.S., and growth should ramp back up.
Online and men's make the difference
The two other tricks up Lululemon's sleeve are its online presence, which is already hard at work overseas, and its men's line. Men's made up 12% of sales in the quarter, and the company sees a lot of growth potential for the line. I agree with that outlook, and as more men wear the stuff, more women are going to be buying it for them. I think once men's hits the 20%-of-total-sales mark, we might see a tipping point (I hate that phrase, but it's really useful) where men start shopping more on their own in the store, as the brand will have gained traction with the population.
Online, Lululemon saw an 89% year-over-year sales increase. That helps explain why the company has spent so much time and money on its social media strategy, which seems to be paying off. That growth should keep up the pace, as Lululemon expands its brand faster than it expands its physical store base. Online sales now make up 14% of total sales, which is a 4-percentage-point gain from last year.
While this push for international growth seems to be offsetting a fall in domestic comparable-store sales, I think the fall is being exaggerated. In the three quarters this year, comparable-store sales have risen by 25%, 15%, and 18%, respectively. Last year, the fourth quarter was the company's best quarter for comparable sales --New Year's resolutions, anyone? So apart from general pessimism, I can see no reason to believe that comparable sales growth will drop below 10%.
The bottom line
Lululemon is a growing company, with a strong brand and an overly depressed idea of what it's going to accomplish in the next few months. There is no reason to doubt that the company will continue its growth, or that it will see success in its new markets. The company is nothing if not careful about expansion, taking on more market research than just about any other retailer I've heard of. If you need a growing apparel company in your portfolio, I'd look to Lululemon.
