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A Lulu of an IPO

In the midst of plunging equity markets last week, investors found solace in lululemon's (Nasdaq: LULU  ) IPO. The company bumped the price range on the offering from $10-$12 per share to $15-$17 and upped the number of shares from 16.4 million to 18.2 million. Yet, the company was able to price the IPO at $18 and the stock surged 56% to $28. A case of Zen madness?

Lululemon is the brainchild of Dennis "Chip" Wilson, a retail veteran. About 10 years ago, he realized that yoga apparel for women was fairly lackluster. So he launched a New Age specialty retailer to fill the void. He wanted clothing that was hip, comfortable, and helped improve performance.

A key growth driver is lululemon's "community-centric" marketing approach. Store employees are called "educators" and undergo 30 hours of training so as to understand the product line. Each store also has a community board for yoga activities as well as a community coordinator to organize events.

The word-of-mouth marketing has been rocket fuel for growth. From fiscal 2004 to 2006, revenues have surged from $40.7 million to $148.9 million. Last year's comparable-store sales increased 25%, and the average sales per square foot was an enviable $1,400.

There is competition from players like Nike (NYSE: NKE  ) , adidas AG, and Under Armour (NYSE: UA  ) . But lululemon has a unique retail concept and it will take time for rivals to build their brands and get to scale.

My concern is the valuation. At current levels, lululemon's shares are trading at a nosebleed 12.6 times revenues, and that doesn't give the company much flexibility in meeting its future financial performance requirements.

While it's true that premium retailers like Zumiez (Nasdaq: ZUMZ  ) sell at high multiples, Foolish investors should remain cautious. It's typical to see lots of hype on an IPO and so it's probably a good idea to let things calm down before buying lululemon. 

For more Foolishness:

Under Armour is aMotley Fool Rule Breakers recommendation. Zumiez is aMotley Fool Hidden Gems selection. Both of these market-beating newsletters are available for a free 30-day trial.

Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. The Fool's disclosure policy is ultrahip. Tom is currently ranked 1,590 out of more than 60,000 participants in Motley Fool CAPS.

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