Like many things in life, shares of lululemon athletica (NASDAQ:LULU) are expensive for a reason. The company has become the leader in women's athletic apparel in the last decade, and commands enviable profit margins and growth rates. Some may say that with its high valuation, this stock is too risky, but there are plenty of potential opportunities awaiting the yoga master.

To give our readers a further understanding of the company, I've published a premium report that takes a deep dive into the issues facing the company. What follows is an excerpt that takes a look at Lululemon's opportunity.

The opportunity
While the retailer may have once been an upstart insurgent in the fashion world, at a market cap north of $10 billion, the yoga-inspired chain has now spawned its own set of imitators. Still, by many estimates this is a young company with a world of new revenue streams ahead of it. Those major growth opportunities lie in international expansion, online sales, and its new ivivva athletica chain, which features dance-inspired gear for girls.

As of its latest quarterly report, lululemon had 189 stores, including ivivva, all of which were in the U.S., Canada, Australia, and New Zealand. By comparison, Gap brands has over 3,000 stores worldwide under its corporate umbrella. With showrooms in Hong Kong and London, Lululemon has begun making inroads into Asia and Europe, which could unlock huge revenue growth opportunities in the future.

Not surprisingly, Lululemon's most mature and strongest market is in Canada, where 49 of its 189 stores are located. Using sales figures from its native country, we can get a sense of potential sales in other markets.

Store Count
PopulationStores per
Million People
(last 12 months)
Canada 49 35 million 1.4 $450 million

Source: 10-Q.

If you consider growth thus far in Canada, Lululemon's core market, and project a similar expansion to other countries around the world, the potential sales look quite impressive.

Store Count
Store Count
United States 119 312 million 437 $4.01 billion
Australia / New Zealand 21 27 million 38 $347 million
European Union 0 502 million 703 $6.45 billion

Source: 10-Q.

According to the chart above, Lululemon could grow its sales by a multiple of 10 if it achieved the same penetration in new markets as it has in Canada. Notice that the chart above does not include sales in Asia or other new regions, and the company continues to open stores in Canada, indicating that there is still plenty of new business to be found in its most mature market.

While revenue from new stores and increasing same-store sales may be Lululemon's largest potential growth area, the direct-to-consumer channel has been the fastest-growing of late. The company held off on launching its online shopping platform until 2009 in order to build its brand and educate customers on its product, which the chain felt it could best accomplish with an in-store experience. In the most recent quarter, direct-to-consumer revenue grew by 91%, to $35.4 million or 12.5% of total revenue. That amount represents about 25% of the company's year-over-year sales growth. As comps moderate, online sales should be a strong growth engine in the years to come.

Finally, the ivivva line adds another potentially valuable revenue stream, as well as enabling further growth in mature markets like Canada, helping to insure against cannibalization and market saturation. With only seven stores currently operating, all in Canada, ivivva is still in its infancy. There are also five showrooms in the U.S., in major cities such as New York and Chicago, which will likely lead to stores in the near future. The brand advertises itself as apparel for active girls -- dancers, gymnasts, ice skaters, and athletes. Lululemon does not separate out ivivva sales in its reports.

Overall socio-cultural trends toward health and fitness also seem to favor Lululemon, as obesity has become a major public health issue in the United States, and new research extols the benefits of exercise and activity as opposed to a sedentary lifestyle.


This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.