A Retailer for All Seasons

A couple of weeks ago, I wrote about a clothing retailer that would specifically profit from the holiday season. Today, I want to talk about another retailer whose massive growth helps it bring in cash year-round: lululemon athletica (Nasdaq: LULU  ) .

What does Lulu do?
Founded by Canadian Chip Wilson in 1998, lululemon is quickly becoming to female athletes what Under Armour (NYSE: UA  ) has become to male athletes. Admittedly, both companies offer sportswear products for either sex, but a look at their marketing shows where each company's target audience lies.

Under Armor got its start with dry-fit T-shirts, and runs commercials of testosterone-pumped football players click-clacking their way onto the football field. Lululemon, on the other hand, began by making yoga gear for women, gives athletic instructors free workout clothes in hopes that their students will go out and buy them.

While some analysts worry that yoga might just be a fad whose passing could sweep lululemon away with it, they fail to appreciate what the company is becoming: a one-stop shop for all sportswear needs.

Room for growth
One of the things Peter Lynch loved about retail stocks was that if a company was popular in one region, it was likely to do well in others. Following that line of thinking, when analysts try to predict how much growth a company like Netflix has left, they look at its penetration rates in San Francisco -- its original home market -- to get a ballpark figure.

We can do the same thing with lululemon. Founded in British Columbia, the company now has one store for every 410,000 people in the province. If we were to extrapolate that to the United States, it would mean that we could one day see about 760 lululemon shops across the country. Clearly, this would be under ideal circumstances, but if the company can accomplish just half of that figure, it would still represent a four-fold increase in its current count of just 86 full-service stores nationwide.

All of this doesn't even factor in lululemon's international growth ambitions. It either has or plans to open branches in Hong Kong, Taiwan, Singapore, the Philippines, New Zealand, and Australia.

Financial strength
Many mid-cap clothing companies are cash flow negative if you factor out their fourth-quarter sales -- not a good sign for growth. Lululemon bucks that trend quite nicely. The following chart shows free cash flow by quarter (in millions) for lululemon and three other high-end, small- or mid-cap clothing companies.

 Company Q3 Q2 Q1 Q4
Under Armor

 ($26.9)

 ($8.6)

 ($19.0)

 $89.6

Deckers (Nasdaq: DECK  )

 ($73.9)

 ($20.9)

 $18.4

 $217.5

Timberland (Nasdaq: TBL  )

 ($99.0)

 $22.8

 ($29.1)

 $192.0

lululemon

 $41.8

 $16.3

 $6.7

 $60.0

Although lululemon's P/E of 59 is sure to keep some investors away, one should remember that lululemon's three-year compound earnings growth stands at 78%. Fool founder David Gardner has already suggested that we not to be afraid of a high P/E when it comes to great companies. If you can stand the risk, lululemon might make an attractive pick-up today.

Under Armour is a Motley Fool Rule Breakers recommendation. Netflix and Timberland are Motley Fool Stock Advisor picks. Under Armour is a Motley Fool Hidden Gems recommendation. The Fool owns shares of Timberland and Under Armour. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Brian Stoffel owns shares of lululemon and Deckers. 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 Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (5)

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: 1399911, ~/Articles/ArticleHandler.aspx, 9/30/2014 12:30:23 PM

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