When investors talk about "blue-chip" stocks, they're generally referring to the largest, most stable companies the market has to offer. These are businesses that tend to experience modest but significant long-term growth, have well-established products and services, often pay steadily rising dividends, and, as a result, are typically considered safer investments than their smaller, more volatile peers.
For investors who buy and hold these companies before they achieve their coveted blue-chip status, the financial rewards can be staggering. Take Nike (NYSE:NKE), a $78 billion company that is expected to collect $30.75 billion in sales this fiscal year. All told, Nike has achieved a total return (including dividends) for investors of more than 36,000% going public in 1980.
Could this be the next Nike?
Let's look, then, at another promising athletic-apparel company: lululemon athletica (NASDAQ:LULU).
Best known for its high-end yoga gear, Lululemon has roughly tripled investors' money since its IPO in 2007, trouncing the broader market's 56% return over the same period:
Lululemon obviously isn't as familiar a name as Nike or even Under Armour (NYSE:UAA) -- the latter of which is another one of my investing favorites and a blue-chip hopeful itself. But Lululemon is still a $6 billion business that trades around 20.7 times next year's estimated earnings, and it expects to achieve revenue of $1.78 billion to $1.8 billion this year. By comparison, Under Armour currently trades around 55 times next year's estimated earnings, sees fiscal 2014 sales of $2.98 billion to $3 billion, and boasts a market cap of $14.4 billion.
So what's the problem with Lululemon? As you can see from the chart above, its gains have been punctuated by massive volatility over the past two years, thanks to a slew of business challenges that slowed its growth significantly. That included a huge recall early last year due to quality control issues, the subsequent resignation of its popular CEO, and conflicts with its founder, now-former chairman, and single largest shareholder, Chip Wilson. As a result, sales in the last fiscal year rose "just" 16% -- capped by 7% growth in the fourth quarter -- which translated to meager 3% growth in net earnings. All things considered, not exactly representative of the stability a blue-chip stock should enjoy.
Progress is being made
This year, however, Lululemon has worked hard to perfect its supply chain as it grows, resolved the issues with Wilson, and enjoys the leadership of a fresh CEO in Laurent Potdevin.
Potdevin cut his teeth at Louis Vuitton parent LVMH, then capped 15 years at Burton Snowboards with five years as CEO, and most recently worked as president of socially conscious shoemaker Toms for three years before heading over to Lululemon. These companies all know what it takes to sustain loyal fan followings with unique, high-end products, which is perfect considering that Lululemon built its business from the ground up through grass-roots campaigns and relationships with yoga instructors and other individual consumers.
Of course, that certainly doesn't mean Lululemon can become a blue-chip stock by focusing on just yoga apparel (and primarily women's yoga apparel at that). But that's where the retailer's burgeoning men's segment and ivivva kids' subsidiary both come into play.
In fact, even amid the company's struggles, Lululemon's men's segment regularly posted double-digit comps growth. Unsurprisngly, the company last quarter confirmed that among the 47 new stores it plans to open in 2014 is its first men's stand-alone location -- in New York City. Investors should keep a close eye on how that store performs as a gauge for whether Lululemon can consistently appeal to both men and women on a broader scale.
Ivivva, for its part, has exploded onto the scene with younger consumers. Mmanagement said ivivva posted 36% comparable-store sales growth in the last quarter, and it is on track to achieve sales of just over $1,000 per square foot for the year. Naturally, Lululemon has outlined plans to accelerate the build out of ivivva, which currently comprises just 33 of the retailer's total 270 stores.
In the end, ivivva and its men's line have propped up Lululemon through it all, which demonstrates the company's aptitude for maintaining growth (however moderate) and solid profitability even as its core business has struggled. Lululemon's overall business also appears to be on the mend, as the stock popped a few weeks ago after the company beat analysts' estimates on both revenue and earnings, narrowed guidance to be in line with expectations, and reiterated its view that gross margin should steadily improve over the next two years or so -- from its current 51% back to the mid-50's range to which investors had grown accustomed before its fall from grace. By comparison, Nike's gross margin last quarter was considered solid after it improved 170 basis points to 46.6%.
In the end, investors hope Potdevin is succeeding in his stated plans to use 2014 as "an investment year with an emphasis on strengthening our foundation, reigniting our product engine, and accelerating sustainable and controlled global expansion." If Lululemon's most recent quarter is any indication, it is well on its way to reaching that goal. When that happens, I see no reason Lululemon won't eventually be considered a fantastic blue-chip stock that can generate tidy profits for investors for decades to come.