Lululemon: Looking Good

lululemon.com

Lululemon athletica  (NASDAQ: LULU  ) has baffled investors for years. After delivering great excitement and significant shareholder returns between 2009 and 2012, the company rolled the dice with its black Luon pants for women in the spring of 2013. This product became national news, but not for the right reasons.

Put simply, the pants were see-through, which led to a public backlash, lost revenue, and added costs. However, while this event is the first thing people like to discuss when they hear the name Lululemon, it's not widely known that Lululemon improved that product and had it back on shelves within 90 days.

This doesn't mean that Lululemon presented a good value investment opportunity late last spring. In fact, over the past year, the stock has declined by 16.8%. This is during a time when other sporting-apparel companies delivered for their investors. For example, Nike's  (NYSE: NKE  )  stock gained 26.2% (it also offers a dividend yield of 1.3%); Under Armour (NYSE: UA  ) put massive smiles on most of its investors' faces, advancing 125%.

After much negative publicity and a decline in brand perception, Lululemon hired a new CEO as well as a new chief product officer. This new leadership is in the process of turning brand perception positive once again. Lululemon now has a clear and simple plan to deliver sustainable growth.

Recent results and future plans
Lululemon had to fight off many headwinds in 2013, but it still managed to deliver a 16% increase in revenue on a year-over-year basis. This was primarily thanks to the opening of 43 new retail locations and comps growth of 2%. If you include e-commerce, then comps grew at a 7% clip. Therefore, demand remains relatively strong.

Looking ahead, Lululemon plans to grow via international and e-commerce expansion. Concerning the former, Lululemon has run many events in several international locations to determine where demand is high. The results have been strong.

Regarding e-commerce expansion, which also includes international expansion, direct-to-consumer revenue increased 33% in fiscal-year 2013. It also represented 16.5% of total revenue, whereas it only represented 14.4% of total revenue in fiscal-year 2012 and 10.6% of total revenue in fiscal-year 2011. Because of these trends, Lululemon plans on using significant resources toward developing this channel.

Lululemon has another edge that many investors don't consider. It generated positive operational cash flow of $278.3 million over the past year. Its balance sheet is impeccable, with $698.6 million in cash and short-term equivalents versus no long-term debt. This financial strength will allow for more maneuverability with investments going forward.

Leaderboard change?
Nike and Under Armour are still much larger companies than Lululemon, especially Nike. However, when it comes to growth potential, Lululemon could gain some ground on Under Armour going forward. Don't get the wrong idea. Under Armour is still likely to be the best growth investment of the three simply because demand for its products is so high. But with new leaders and clear-cut goals in place, Lululemon could close the gap.

If you're considering an investment in either Lululemon or Under Armour, there are a couple of important factors to consider. One, Lululemon is only trading at a reasonable 27 times earnings, whereas Under Armour is trading at a much more expensive 77 times earnings. This leaves less margin for error for Under Armour. Nike is trading at 25 times earnings.

Now consider revenue growth versus selling, general, and administrative expenses over the past year for Lululemon. Notice the recent change for the better:

LULU Revenue (TTM) Chart

Lululemon revenue (trailing-12 months) data by YCharts

When revenue outpaces SG&A expenses, it's often a sign that management knows what it's doing.

Here's the same chart for Under Armour and Nike:

UA Revenue (TTM) Chart

Under Armour revenue (trailing-12 months) data by YCharts

Under Armour has seen its top line continuously outpace its selling, general, and administrative expenses. Nike recently saw paths cross for the worse. This isn't to say Nike would be a bad investment--it's one of the strongest brands in the world, and it's constantly innovating. This is more to point out how well Lululemon and Under Armour -- two growth companies -- are managing to deliver in this regard.

The Foolish bottom line
Lululemon appears to be heading in the right direction. With new upper management in place, clear-cut goals to deliver growth via international and e-commerce expansion, and the stock now trading at 27 times earnings, potential rewards seem to outweigh downside risk -- barring a steep broader market correction. Please do your own research prior to making any investment decisions.

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