I generally avoid retail stocks like the plague, and in a recession I avoid them like the plague that turned everyone into zombies in the movie I Am Legend. Yet I was pretty impressed when I discovered The Buckle
lululemon athletica
The kicker with lululemon, besides the ridiculous name, is that its financials help make the case that exercise is recession-proof. Even better, the company is putting up numbers similar to Nike
The company also demonstrates better return on assets and equity, and its operating margins are astounding given its much smaller size. A small-cap competitor in the same space, Under Armour
Company |
Market Cap (in Billions) |
Gross Margins |
Operating Margin |
P/E (TTM) |
Return on Equity |
YOY Earnings Growth |
---|---|---|---|---|---|---|
lululemon athletica |
$3.1 |
51.5% |
21.5% |
44.9 |
32.7% |
90.8% |
Nike |
$35.9 |
45.2% |
13.2% |
21.1 |
19.6% |
5.5% |
Under Armour |
$1.8 |
48.7% |
10.3% |
37.0 |
13.3% |
27.1% |
Source: Capital IQ, a division of Standard & Poor's.
While both lululemon and Under Armour are growing quickly, I prefer lululemon, and the chart shows why. Gross margins are slightly better, but lululemon's operating margins blow away Under Armour's, meaning the former has a much better handle on corporate overhead.
And lululemon is growing faster, justifying its higher P/E. Its stunningly high ROE demonstrates that it's far more efficient at using its earnings to generate additional earnings. With no debt, $173 million of cash on hand, and trailing free cash flow of $108 million, lululemon can expand its operations using cash from operations alone. Its market cap is 8% of Nike's, and with such luscious margins, lululemon could grow that large one day if it can also become the marketing genius that Nike is.
Here's another example of why investors might want to look closely at small caps in a sector experiencing secular growth. I've also written about a similar company, Medifast
One thing's for certain: If plague zombies ever chase you, run into a lululemon store on the way to your hidey-hole. At least you'll look good while you run for your life.