Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Should You Bet on the Action at Lululemon Athletica?

Source:  Lululemon Athletica

Shareholders in athletic apparel maker Lululemon Athletica (NASDAQ: LULU  ) haven't had much to smile about in 2014, as the company continues to struggle with slowing sales and profit growth far below its historical pace. The company has been pressured by a need to engage in promotional selling behavior, likely due to heightened competition in the women's apparel area by major industry players, like Under Armour (NYSE: UA  ) and Nike (NYSE: NKE  ) .

However, Lululemon's share price showed some life recently, ostensibly due to media reports that company founder Chip Wilson, owner of more than one quarter of the total outstanding shares, might be looking to foment some changes at the company. Lululemon's stock price also got some help when the company announced a new $450 million stock repurchase plan, equivalent to roughly 8% of its market capitalization. So is it time to bet on this former highflier?

What's the value?
Lululemon has built a strong franchise in the athletic apparel space by focusing on women's desire for comfortable, yet fashionable, attire for use in their athletic pursuits and active lives, a focus that has won it a loyal, growing customer base. The company has also benefited from premium brand positioning which has allowed it to sell products at relatively high price points, thus ensuring a solid level of operating profitability. Consequently, Lululemon has enjoyed solid cash flow that has fueled further product development and an expansion of its store base, which has resulted in a strong trajectory for its top-line and profit growth over the past five years.

That favorable trajectory, though, took a bit of a hit in its latest fiscal year due to a well-publicized quality control problem with its popular Luon pants. While the company's quick decision to recall the affected products was undoubtedly the right move from a customer service perspective, it saddled Lululemon with significantly higher costs that included large inventory writedowns. The net result for Lululemon was lower-than-expected growth in operating income at 4% during the period, a data point that anecdotally led to a contraction in the multiple that Mr. Market was willing to pay for the company's earnings.

Looking into the crystal ball
Of course, the question for investors is whether Lululemon can raise its profit growth trajectory back to the double-digit level, thereby providing a solid foundation for a higher market valuation. Unfortunately, things are not looking great in that respect based on the company's performance in its most recent fiscal quarter, as its operating income increased 5.9% as a rise in marketing and selling expenses negatively affected the result.

Part of Lululemon's problem seems to be that its major competitors continue to view the women's apparel segment as a major part of their future growth plans.  Under Armour, for its part, generated roughly $500 million from the sale of women's apparel in its latest fiscal year, approximately 20% of its total sales tally. More worrisome for Lululemon, Under Armour's aspirations in the segment only seem to be getting larger, as it recently introduced the Armour Bra and UA Studio product lines with support from a targeted media campaign.

Likewise, Nike has its eye set on greater sales from its female demographic, a subset of its customer base that accounted for roughly 21% of its total sales in its latest fiscal year and generated a 10.6% increase in sales compared to a 7.1% gain in sales for male-oriented merchandise. The company had already been actively investing in greater product selection for its female customers and this included incorporating its Dry Fit technology into its pants product offerings, the product category that put Lululemon on the map. However, Nike's growing success in the female-oriented segment will likely only lead to greater product development and more support from its marketing machine which will further pressure its smaller competitors.

The bottom line
Mr. Market is clearly negative on Lululemon's near-term prospects and has driven the company's stock price down to near a 52-week low. With a rock-solid balance sheet and growing customer volumes, though, the company is an intriguing bet at its current price level.  While Under Armour and Nike are worthwhile challengers in the space, Lululemon's brand appears to have survived its product quality breakdown intact, which positions it for higher profit growth and shareholder value over the long run.

Leaked: Apple's next smart device (warning, it may shock you)
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!

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

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: 3037266, ~/Articles/ArticleHandler.aspx, 9/2/2015 8:55:43 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...

Robert Hanley

Today's Market

updated 11 hours ago Sponsored by:
DOW 16,058.35 -469.68 0.00%
S&P 500 1,913.85 -58.33 0.00%
NASD 4,636.11 0.00 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/1/2015 3:59 PM
LULU $63.07 Down -0.94 +0.00%
Lululemon Athletic… CAPS Rating: ***
NKE $108.63 Down -3.12 +0.00%
Nike CAPS Rating: *****
UA $93.16 Down -2.37 +0.00%
Under Armour CAPS Rating: ****