Sometimes I see a board game that I really want, but I hold off hoping it'll go on sale. Then all of a sudden, it gets super popular, and you can't even find it on the shelf, much less buy it. Then the new hot thing comes along, and what your really wanted goes on sale. Welcome to the world of the potential lululemon athletica (Nasdaq: LULU) investor. After a less-than-spectacular earnings report and forecast, the company has dropped from its highest highs and is back down in "Is it worth it?" range. But all those ups and downs make me nauseated. Check out this steady grower for less roller and more coaster.
Why are investors even interested?
Lululemon has taken something that no one cared about -- yoga clothing -- and made it popular. Under Armour (NYSE: UA) made a similar move a few years back with sweat-wicking clothes. Workout clothing was made out of cotton, so who cared if you tried something different? Oh, I see -- everyone suddenly cares.
It's clear that Lululemon has a lot going for it, which is why investors are interested in the first place. Last quarter it increased revenue by 53%, while same-store sales increased 25%. To put that in context, it's a lot. The real downer -- if you can call it that with a straight face -- was the company's forecast for the rest of 2012, which included slower growth in the second quarter. In addition, the company has said that it will be spending less time chasing sales in the first three quarters and focusing on product innovation instead.
Well, that's not so bad
I've said before that Lululemon is doing lots of things right, and that I expect it will continue to do good things. But there are so many other options to invest in that I feel bad sinking my cash into a stock that's going through such violent ups and downs. Before you jump on one of these market-leading trains, consider the financial and emotional costs -- Lululemon trades at a forward P/E of 30, and Under Armour trades at a P/E of 36.
While it's easy to look back at the year and retrospectively see the highs and lows, it's a lot harder to pick them out as they're happening. And while the past isn't indicative of the future, it does point to one of the dangers of being on the leading edge of an industry -- volatility. Lululemon is still defining what it can give the world, and figuring out if the world is interested. Sometimes the world seems very interested, sometimes less so. Investors bake consistent high interest in, and when you mention slower growth in the second quarter, they get antsy and the stock can drop.
The discount alternative
That bleeding edge is why these companies are trading so high -- they're the current market leaders, and they got there by breaking conventions. But now that they've seated themselves at the top, there's a premium for holding the stocks. I want something cheaper that allows me to buy without worrying if the stock is too expensive, which why I've been so excited about Gap (NYSE: GPS) recently.
Gap isn't going to be changing the world anytime soon, but it's moving in the right direction. Last quarter, it grew same-store sales by 4%, which is much lower than Lululemon. It also grew revenue and earnings per share, though again, not by as much. One of the ways Gap is trying to get ahead is by taking the fight to Lululemon with its own Athleta line. Right now, that business accounts for less than 3% of total revenue, but it can't be ignored. According to a Bloomberg report, of the 22 Athleta stores that were open in June, 13 are within a mile of a Lululemon location.
The bottom line
For me, the final point in Gap's favor is its low relative cost. Instead of looking at a forward P/E in the 30s, you get to buy Gap at 15, and thus I get to sleep easily. The trade-off is obviously the speed at which the company grows. Lululemon is jumping by leaps and bounds each quarter while Gap is just chugging along. But for my peace of mind, I'd rather have the cheap tortoise than the expensive hare.
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