3 Areas to Watch With lululemon athletica

Shares of lululemon atheltica (LULU 0.80%) have been relatively stable over the last few weeks as the stock seems to have settled into a holding pattern with earnings due in March. Investors may be asking if the yoga outfitter can keep up its rapid growth and maintain its fat margins as competition heats up. To help answer those questions, we've isolated three key factors below, taken from our premium research report, that should determine its future success:

The 3 areas you must watch

1. Same-store sales
Always a widely watched statistic in retail, comparable sales (i.e., same-store sales or comps) are especially important for a fast grower like Lululemon. Higher same-store sales are the most profitable form of new sales because they don't require as large a capital investment as opening a new store. If the apparel chain can keep its enviable same-store sales growth, investors should reap the benefits. The chart below shows recent figures of comparable-store sales growth:

Source: Earnings releases.

Lululemon's comps have fluctuated significantly over the last six quarters, and at a minimum of 15%, growth has been remarkably strong. By comparison, high-single-digit comps are generally considered impressive in retail. If the apparel maker can stay within this range, shares should continue to climb. If comps start to flag into the single-digit range, look for investors to flee. Relatedly, shareholders will want to watch direct-to-consumer sales, as strong growth in that area could take away from same-store sales.

2. International expansion
Just as Lululemon's current valuation assumes that its strong same-store sales growth will continue, it also implies there are hundreds more store openings in the company's future. The expansion will depend on its ability to reach foreign markets with the same gusto it's had in North America. With showrooms now open in London and Hong Kong, the company is just dipping its toes in these huge international markets.

Lululemon's London showroom opened in April and appears to be well-received, with high ratings on Yelp and over 1,700 "likes" on its Facebook page. The Hong Kong showroom opened in May, and according to CEO Christine Day, "customers had come from all over Southeast Asia to buy in bulk," a likely sign of pent-up demand.

In 2008, the company pulled the plug on its Japanese venture, closing three stores in that nation so it could focus on North American expansion. That experience should provide a few lessons for management as it steps up its international presence.

3. Competitive threat
As discussed above, the expansion of Athleta and other similar brands could eat into Lululemon's business. Women's athletic apparel is certainly a growing market, and rivals such as Gap and Nordstrom could take a bigger piece of the larger pie in the future. The company's previous litigation over design patents with Calvin Klein has since been settled out of court with both companies not disclosing any details. Without an official decision from the courts, this suggests Lululemon may be more susceptible to different competitors' products. 

Investors should also keep an eye on the yoga retailer's profit margins. Its current operating margin of 27% crushes the industry average, but competition, especially in the form of lower prices, tends to eat away at that advantage over time. Lululemon's ability to withstand the wannabes will best be seen through this financial metric. Sustaining those margins will indicate continuing demand as well as consumers' willingness to pay the high prices Lululemon charges.