Is There Too Much Competition in Women’s Athletics?

Lululemon athletica  (NASDAQ: LULU  ) was long considered a momentum stock, trading at a relatively expensive valuation and seeing large swings in its stock price. It is still trading like a momentum stock, with large moves in its stock price, yet its valuation is much more reasonable these days. The question has now become, is Lululemon trading at current levels because of its marketing and quality mishaps, or is it feeling the pressure from competition?

Competition heats up
Retailers and apparel makers are recognizing the need to have exposure to women's athletics. Thus, the rise in retailers focused on women's athletic apparel is twofold for Lululemon. One, it means more competition. Two, it is a testament to the rising popularity of athletic apparel for women. A key advantage for Lululemon is that it has a strong brand name that resonates with female shoppers.

Dick's Sporting Goods fell off a cliff last week after lowering guidance for this fiscal year. However, it was not all bad news. It noted that its women's athletic-apparel business is seeing strength in comparable-store sales. This kind of growth is prompting the company to devote more space to the apparel category. Dick's Sporting Goods also noted that its women's business has the best growth prospects of all its segments.

Gap (NYSE: GPS  ) is a bit different, as it caters to a variety of customers. It not only owns Lululemon's top competitor, Athleta, but also Old Navy, The Gap, and Banana Republic. In addition, Gap as a whole appears to be hitting on all cylinders. Last month it announced fiscal first-quarter earnings of $0.58 a share, beating its own guidance of between $0.56 and $0.57 a share, while also topping consensus of $0.57 . Gap's same-store sales were up 9% in April with total sales up 10%.

Then there is Under Armour (NYSE: UA  ) , which has been gaining serious momentum across all areas of athletic wear over the last few years. It only gets about a fifth of its sales from women's wear. It is already becoming more of a serious player in footwear, but the valuation is still a point of concern. The company was cautious on last quarter's earnings call, noting that sales growth could be slowing. In addition, for a company that trades well above most peers, at a current P/E of 60, slowing growth could be a big problem.

The Lululemon advantage
The best thing about Lululemon is that it gets the majority of its revenue from women's athletics. That is unlike Under Armour and Gap, which have exposure to a myriad of other brands and segments. This means that Lululemon could also be very enticing from a buyout standpoint.

With a market cap of just around $8 billion, it would not be the easiest acquisition but still feasible for one of the major apparel makers that want quick and easy access to women's athletics. The most likely suitor would be VF. ISI's Omar Saad has noted that VF is really like a private equity firm that buys up growing brands. Moreover, Lululemon is a growing brand.

How shares stack up
It has been a very tough year for Lululemon so far, with shares down 25%. Meanwhile, Under Armour is up 7.5% and Gap is up 4%. Lululemon's stock is now down 45% from its 52-week high. However, its return on invested capital is an impressive 25%. That is well above Under Armour's 14% but still lags Gap's 30%.

Lululemon trades at a P/E of right at 20 based on next year's earnings estimates. That is about half of Under Armour's P/E of 40. However, the cheapest of the three is Gap, trading at a P/E of 12. Gap is also the only one that pays a dividend, currently yielding 2.2%.

Bottom line
The women's athletic-apparel industry continues to heat up. It remains to be seen whether the industry is big enough for Lululemon, Under Armour, and Gap to all excel. Nevertheless, one thing remains: Lululemon is still the purest play on the industry. For investors wanting to invest in the fast-growing women's athletic- apparel business, Lululemon is worth a closer look.

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

 


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2985632, ~/Articles/ArticleHandler.aspx, 10/2/2014 11:17:21 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement