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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

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