Buying the Best, No Matter the Cost

Yesterday I tried on a tuxedo jacket. My wife has a big event to attend for her job soon, and we decided to dress up, so I'm in the market for a tux. The jacket I tried on was magnificent. Perfect fix, great material, lifetime of use -- $1,100. So I'll be renting a tux. But just because it seemed like a silly price to pay doesn't mean that it wasn't worth the investment. As the saleswoman said, "In this town, you could wear a tux every night."

The problem with the tux was my problem -- I don't have that kind of cash. It's the same reason I don't buy lululemon athletica (NASDAQ: LULU  ) . The stock is excellent, the brand is strong, and the plans for growth make perfect sense -- but it trades at a P/E near 45. I'm still building my portfolio, so I'm looking to start small and work my way up. However, my shortfall shouldn't stop other people from seeing the light. Here's an in-depth look at why Lululemon is going to have an excellent 2013.

Product diversification
Lululemon's main product line is its women's yoga clothing. This time last year, the website featured almost exclusively yogawear, but now it has a few new additions. First of all, the brand has branched out into running gear. Right now, that line is flying under the radar, but the company is already planning to occupy the running space long-term. Specifically, Lululemon wants to be the leader in layering products for runners. That goal explains its expanded line, which now includes outerwear and base layers for runners, instead of pieces simply brought over from its yoga line.

It also explains why the company has made its other diversification, into menswear. Men now fall behind women as a percentage of total competitive runners, but they still make up 45% of the running population. Compare that to yoga, where men make up less than 30% of participants. To help draw more men into the store, Lululemon is addressing a sport that men feel more comfortable with. Both of these areas should get increased focus and investment in 2013, and should help the business grow its top line.

Footprint expansion
Right now, Lululemon runs just over 200 stores in North America and Australia. In order to grow its international footprint, the company has already opened online stores in Asian and European markets. Starting in 2013, it's going to be pursuing a more aggressive expansion approach, with the goal of entering 15 new countries over the next two years. That growth is going to start in the U.K. -- with a London flagship -- and in Hong Kong.

The targeted nature of the expansion should help Lululemon replicate the sort of success that other high-end retailers, like Michaels Kors (NYSE: KORS  ) , have achieved overseas. Kors posted a 50% increase in comparable-store sales last quarter, leading to a 97% increase in revenue. The company pulled a similar stunt in Japan, increasing comparable-store sales by 17%. Lululemon would love to use that model for its own expansion, and 2013 is going to be the first big international year for the company.

Increased competition
In the world of expensive things, having more people selling them is excellent for business. If one guy is selling shoes for $500, it's crazy; if everyone's doing it, $500 becomes normal. That's why Lululemon's shareholders should be lining up to thank Gap (NYSE: GPS  ) for the push that it's been giving to its Athleta line. The brand competes directly with Lululemon, and Gap has even gone so far as to open most of its locations within a few miles of Lululemon's stores.

The continuing popularity of Under Armour (NYSE: UA  ) should also help Lululemon, especially as it moves into men's clothing. Under Armour is actually making the opposite move, and pushing for women's sales. In its last earnings release, the company said that it was investing in its leadership team as part of "our commitment to realizing our long-term vision of one day having our Women's business larger than Men's." The increased activity in 2013 should add one more boost to Lululemon's bottom line.

Summary
Lululemon is diversifying its product lines, expanding its reach, and getting a leg up from competitors. Over 2013, investors should start to see a shift in the sales mix, and some new locations around the globe. Those changes are going to help the brand grow, and help investors get their money's worth out of this pricey -- but potent -- stock.

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  • Report this Comment On January 05, 2013, at 12:49 PM, 48ozhalfgallons wrote:

    With the exception of drugs, one cannot expect high profits selling to the poor.

  • Report this Comment On January 06, 2013, at 3:16 PM, mikecart1 wrote:

    48oz,

    Or Apple products lol. People will fall behind on bill payments or rent in order to keep up with the 'status symbol' of owning Apple products.

    :D

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