When it comes to investing, knowing when to buy, sell, or hold a stock can mean the difference between making money and losing it in the market. However, making the best decisions for your investments can be challenging. Fortunately, investors can minimize risk by weighing both the pros and cons of a given stock before deciding how to act. Today, we'll take a closer look at lululemon athletica (NASDAQ: LULU ) and evaluate whether investors should buy, sell, or hold this retail stock ahead of the New Year.
lululemon has had a nice run in 2012, with shares up more than 57 % year to date. And there seems to be even more upside in the name, despite the stock's impressive performance thus far. lululemon CEO Christine Day has transformed this company from a trendy yoga-inspired apparel maker into a global powerhouse.
The company recently reported third-quarter earnings that once again exceeded analyst estimates. Net Revenue grew 37% to $316 million, and same-store sales climbed 18% for the period . lululemon is also evolving as a brand. The company is now directly challenging established players in the industry, such as Nike (NYSE: NKE ) and Under Armour (NYSE: UA ) , by expanding into new categories including men's wear and youth apparel through its Ivivva dance line.
However, unlike these sporting goods giants, lululemon's growth story overseas is just getting started. lululemon currently operates 201 company-owned stores in the U.S., Canada, and Australia . Although Christine Day said the company plans to test demand for its products in more than 15 countries over the next two years . That's good news for future profitability considering most of the company's current success comes from sales within the United States.
lululemon is already generating sales through its direct-to-consumer channels in these markets, ahead of its physical store debuts. Freshly launched websites in Hong Kong, Singapore, Britain, and the European Union helped drive up lululemon's e-commerce revenue by as much as 89% in the third quarter.
Growth in new markets and product categories bodes well for lululemon going forward. However, the stock is not without risks. Let's take a closer look at why investors may want to sell.
Shares of lululemon are expensive. The stock currently trades at nearly 50 times earnings, at around $72 apiece. This implies that much of the company's future growth is already factored into the current share price. Increased competition from larger rivals is another negative. Limited Brands (NYSE: LB ) owned Victoria's Secret sells competing products including yoga pants that sell for a third of the price of a pair of lululemon pants.
The Gap (NYSE: GPS ) and Nordstrom (NYSE: JWN ) have also moved into the space given the low barrier to entry in this market. As it is the Gap is opening its Athleta (not to be confused with lululemon athletica) brand stores nearby lululemon locations across the U.S. Separately, lululemon's technical fabrics aren't patent protected . This could prove challenging as competitors attempt to steal market share from lululemon by closely copying the design of its apparel.
While the international growth story looks promising, lululemon is known for taking its time when it comes to new store openings. Because the company relies on grassroots marketing and not celebrity endorsement deals, the management team must carefully select local lululemon ambassadors for each new location it opens . These so-called ambassadors are fitness leaders within their respective communities, who in exchange for 15% off merchandise, teach classes and train exclusively in lululemon gear.
Because of this cautious approach, it may be years before lululemon has a solid presence in foreign markets such as Europe and Asia. For this reason, investors may want to wait for now and see how well the brand translates into these new markets in the years to come.
The Vancouver-based company is still the leader in the more than $14 billion women's active wear market . However, in the quarters to come, added competition from much bigger rivals could eat into lululemon's share of that market. But what investors need to realize is that, as with any hit brand, competition is inevitable.
Looking ahead, new store openings in Europe, Asia, and emerging markets will be key to lululemon's ongoing success. Last year, with just 112 U.S. locations, lululemon broke the billion-dollar mark for the first time . If the company is able to replicate its U.S. success worldwide, it won't be the last time we celebrate record sales for this retailer.
I have confidence in management's ability to execute, and that paired with superior brand strength is why I believe lululemon is a buy today, despite the stock's rich valuation.
Lululemon has the potential to grow its sales by 10 times if it can penetrate its other markets like it has in Canada, but without question, the competitive landscape is starting to increase. Can lululemon fight off larger retailers like Gap and Nordstrom, and ultimately deliver huge profits for savvy investors like yourself? The Motley Fool answers these questions and more in our most in-depth lululemon research available for smart investors like you. Thousands have already claimed their own premium ticker coverage, and you can gain instant access to your own by clicking here now.