After Getting Slammed, Is Lululemon a True GARP?

With shares of Lululemon trading around a new 52-week low, is the company an amazing growth prospect or should investors opt for Under Armour instead?

Jun 21, 2014 at 9:00AM

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Source: Lululemon

In the investment world, opportunities that are dubbed "GARP" stocks arise from time to time. In essence, a company that is a GARP prospect is one that is sporting strong growth but can be purchased for cheaper than other fast-growing businesses. After reporting revenue and earnings on June 12, shares of Lululemon Athletica (NASDAQ:LULU) plummeted 16% to close at $37.25. With shares in the retailer on sale for a 52% discount from their 52-week high, is the business a strong GARP investment? If not, would shareholders be better off looking to Under Armour (NYSE:UA) instead?

Lululemon passed estimates... sort of
For the quarter, Lululemon reported revenue of $384.6 million. In addition to coming in higher than the $381.2 million that analysts anticipated, the company's top line represented an 11% gain compared to the $345.8 million management reported the same quarter a year earlier. In its press release, the company attributed this rise in revenue to an impressive 21% jump in store count from 218 locations last year to 263 this year. This was, however, partially offset by a 2% decline in comparable store sales for the quarter.

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Source: Lululemon

From a revenue perspective, it's not too hard to tell that Lululemon did quite well. It's a bit trickier to assess the company from a profitability perspective, though. For the quarter, the retailer reported earnings per share of just $0.13. This fell short of the $0.32 Mr. Market wanted to see and came in 59% lower than the $0.32 management reported the same quarter a year ago. After adjusting for tax charges related to the repatriation of foreign earnings, however, Lululemon's earnings came in at $0.34.

Is Lululemon the retailer of the future, or is Under Armour better?
The past five years have been amazing for Lululemon. Between 2009 and 2013, the retailer saw its revenue soar 251% from $452.9 million to $1.6 billion. In its most recent annual report, management attributed this rise in sales to an aggregate comparable store sales increase of 116% and to the 105% rise in store count from 124 locations to 254 the business experienced.

UA Revenue (Annual) Chart

UA Revenue (Annual) data by YCharts

During a similar five-year period, rival Under Armour saw its sales grow a still impressive, but not quite as strong, 172% from $856.4 million to $2.3 billion. Unfortunately, the retailer does not provide disclosure on its comparable store sales. It did disclose that its store count had increased 263% from 35 locations in 2009 to 127 by the end of its 2013 fiscal year.

From a profitability perspective, Lululemon continued to lead the way. Over the past five years, the retailer saw its net income skyrocket 379% from $58.3 million to $279.5 million. This was due largely to the company's rise in sales, but it's also important to factor in its cost of goods sold which fell from 50.7% of sales to 47.2% of sales and its selling, general, and administrative expenses, which declined from 30.1% of sales to 28.2%.

UA Net Income (Annual) Chart

UA Net Income (Annual) data by YCharts

Under Armour also did well for itself during this timeframe, but not quite as well. Between 2009 and 2013, the retailer saw its net income leap 247% from $46.8 million to $162.3 million. Just as in the case of Lululemon, Under Armour's rising profits came from positive revenue growth, but it also benefited from its cost of goods sold falling from 52.1% of sales to 51.3%, while its selling, general, and administrative expenses dropped from 37.9% of sales to 37.4%.

Foolish takeaway
It's clear that Mr. Market was depressed about Lululemon's results for the quarter. However, the long-term performance of the company and forecasted sales growth of 11% to 13% for this current fiscal year should serve as positive signs. When you add to this the fact that the company's forecasted P/E of 21 to 22 times earnings is significantly higher than Under Armour's 62 times earnings, it's hard to argue that the enterprise is anything but an interesting prospect to analyze.

The only downside moving forward appears to be the company's recent decline in comparable store sales. While this could be a temporary bump in the road, the Foolish investor should take notice and reevaluate their opinion of the retailer should this trend continue.

Leaked: Apple's next smart device (warning, it may shock you)
Although fashion companies like Lululemon and Under Armour have had a good run, Apple's about to come out with a new wearable device that could turn even technology hot!  The best thing about this is that it's not too late for YOU to get into the fray and benefit!

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Daniel Jones has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica and Under Armour. The Motley Fool owns shares of 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.

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