Is lululemon athletica Destined for Greatness?

The yoga pants might be a little flimsy, but Lululemon can still be a rewarding investment if it can regain its flexibility.

Jan 29, 2014 at 2:40PM

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does lululemon athletica (NASDAQ:LULU) fit the bill? Let's take a look at what the athletic apparel retailer's recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Lululemon's story, and we'll be grading the quality of that story in several ways:

  • Growth: are profits, margins, and free cash flow all increasing?
  • Valuation: is share price growing in line with earnings per share?
  • Opportunities: is return on equity increasing while debt to equity declines?
  • Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Lululemon's key statistics:

LULU Total Return Price Chart

LULU Total Return Price data by YCharts.

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

148.2%

Pass

Improving profit margin

17.8%

Pass

Free cash flow growth > Net income growth

50% vs. 192.3%

Fail

Improving EPS

187.6%

Pass

Stock growth (+ 15%) < EPS growth

108.6% vs. 187.6%

Pass

Source: YCharts. *Period begins at end of Q3 2010.

LULU Return on Equity (TTM) Chart

LULU Return on Equity (TTM) data by YCharts.

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(17.2%)

Fail

Declining debt to equity

No Debt

Pass

Source: YCharts. *Period begins at end of Q3 2010.

How we got here and where we're going
Lululemon puts together a strong performance, earning five out of seven passing grades. However, Lululemon's free cash flow has lagged behind net income growth for much of our tracked period, as the company has been investing heavily in expansion plans. That's not enough to call this stock stale, as Lululemon could still earn a perfect score next year with proper progress. How might Lululemon's new CEO put the fashion-forward athletic-wear company back on its upward track? Let's dig a little deeper to find out.

Lululemon's stock recently collapsed by double-digits after management issued a weak fourth-quarter forecast. Fool contributor Joseph Gacinga notes that Lululemon has endured several manufacturing and supply chain issues over the past few quarters, which forced the company to reduce its full-year guidance and which wrecked a great deal of share-price appreciation in recent months. The company had to recall about 17% of all yoga pants due to excessive "sheerness" under certain conditions, and Lululemon still receives a large number of complaints related to product quality and poor customer service. Lululemon's misfortunes have blown open a hole for upstart yoga-apparel makers such as Under Armour (NYSE:UA), which addresses Lululemon's sheerness problem head-on in its latest studio yoga wear ad campaign. However, D.A. Davidson analysts recently upgraded Lululemon to buy, citing strong growth potential if it can move past its see-through pants problems.

Gap (NYSE:GPS) has also been competing head-to-head with Lululemon in yoga apparel, opening several Athleta yogawear outlets near Lululemon locations to siphon off the latter's traffic with lower-priced goods. Fool contributor Andres Cardenal points out that the company has imitated Lululemon's strategy by partnering with yoga instructors to offer fitness classes, which undermine Lululemon's uniqueness and thus minimize its competitive advantage. Under Armour has also made a series of big moves, signing endorsement deals with ballet dancer Misty Copeland, tennis star Sloane Stephens, and skier Lindsey Vonn. Moreover, Under Armour's bra line has fared extremely well across its studio platform, which competes directly with Lululemon. Fool contributor Marshall Hargrave notes that Nike (NYSE:NKE) seems to be aiming high in the women's yoga-apparel business, and the company expects to grow its global sports-apparel market share to 6.5% by 2019.

Lululemon's top management roster has suffered a bit of turnover over the past few quarters, which has weakened its ability to rehabilitate a deteriorating brand image. Fool contributor Chad Henage notes that Lululemon has been tapping athletic menswear for new avenues of growth, while Under Armour -- already firmly established as a manly sportswear brand -- is trying to expanding into womenswear and yogawear. Lululemon has been trying to broaden its market by opening new "ivivva athletica" stores aimed at young athletic girls, and could eventually leverage a growing demand for wearable technology as well. Over the next five years, Lululemon's earnings per share is expected to grow by a staggering 18.4% per year, while Gap and Nike will grow only by 13.5% and 12.3% annually, respectively. Since post-crash Lululemon shares now trade at a P/E of 24.3, as compared to 24.4 and 13.2 for Nike and Gap, Lululemon now seems once again to be a strong bargain for growth-focused investors.

Putting the pieces together
Today, Lululemon has many of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

Find the next Lululemon before it takes off...
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Alex Planes has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica, Nike, and Under Armour. The Motley Fool owns shares of Nike and Under Armour. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

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.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

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. The show is also heard weekly on dozens of 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. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers