2014 Will Be a Good Year for Lululemon as Women Get Active

This stock has taken its lumps of late, but it's still a fan favorite and it should also be an investor favorite.

Jan 21, 2014 at 4:43PM

Lululemon (NASDAQ:LULU) has been a tough apparel retailer for investors to own over the last year. Holding the stock got even tougher this week when Lululemon offered some insight into its performance so far this year.

The stock fell off a cliff after the update, dropping as much as 15% in a day. Lululemon provided an outlook for January traffic and sales that showed these numbers had decelerated meaningfully in comparison with December. As a result, the company slashed its fourth quarter earnings per share guidance range to $0.71-$0.73 from the previous $0.78-$0.80.

This could still be a chance to buy into Lululemon in preparation for a strong 2014. ITG's channel checks showed that Lululemon is actually tracking ahead of consensus estimates for its fourth quarter sales. Although Lululemon's store traffic has been weak so far this year, its same-store sales would actually have been positive if they included e-commerce.

The Lululemon brand continues to resonate with consumers. Its premium brand was expected to see some trade-down, but this has yet to happen. As noted at the ICR Xchange Conference, consumer research shows that Lululemon still tests very positive for brand loyalty. Lululemon also has unrivaled design and quality over major peers. The company has had a number of hiccups, but it continues to conduct brand perception surveys and the brand is resonating with an increasing number of consumers. It changed suppliers after its latest quality control incident and implemented a new program that randomly rewards its customers with "random acts of kindness," such as trips. 

The market continues to heat up for women's athletic and yoga-focused apparel. The GAP (NYSE:GPS) launched Athleta to compete with Lulu, and Nike (NYSE:NKE) is also looking to get deeper into the women's business.

However, Lululemon continues to be the leader when it comes to flows to the bottom line. That is, Lululemon has some of the best margins in the business. Lululemon's net profit margin over the trailing twelve months is above 18%, while Nike's is 1% and Gap's is 8%.  

Both Gap and Nike are much more than women's apparel companies. While Lululemon can focus on making the shopping experience better for women, Nike has to worry about its core business, shoes, and Gap must manage its various brands -- Old Navy, The Gap, and Banana Republic.

While Gap has been orchestrating an impressive turnaround since 2004, it's still got a long way to go. This includes catching up with other retailers in e-commerce and getting its international growth plan on track. Given the questions about the retailer, it trades rather cheap at less than 15 times earnings. On a positive note, Gap does have a relatively low PEG ratio at 1.1 and it could surprise investors if it had a better holiday season than they expected.

The one positive about Nike is that it already has a presence in emerging markets, namely China. Lululemon is still a U.S. operator with over 90% of its revenue tied to the U.S. One the flip side, some of Nike's biggest struggles have been in China. During Nike's fiscal first quarter it saw revenue down 3% year-over-year in China, with footwear sales down 7%.

Bottom line
Lululemon is expected to grow EPS by an impressive 18.4% per year over the next five years. Meanwhile, The Gap is expected to grow at 13.5% per year and Nike at 12.3% per year. Lululemon is trading around $47 per share and it has yet to recover from its pants debacle. Its short interest is still relatively high at 20%, which means the results of a solid fourth quarter could lead to a short squeeze. 2014 should be a great year for Lululemon investors. 

Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica and Nike. The Motley Fool owns shares of Nike. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers