I generally avoid retail stocks like the plague, and in a recession I avoid them like the plague that turned everyone into zombies in the movie I Am Legend. Yet I was pretty impressed when I discovered The Buckle (NYSE: BKE) bucking the recessionary trend by selling the basics to middle America. Now, I've discovered a company that can ride the secular trend toward living healthy leads to surprising investments.

lululemon athletica (Nasdaq: LULU) devotes itself to the people who devote themselves to exercise. I'd seen the store in malls, but I'd never poked my head in until the other day. Not only does the company carry stylish and functional athletic apparel and accessories, but it also designs and manufactures the items itself.

The kicker with lululemon, besides the ridiculous name, is that its financials help make the case that exercise is recession-proof. Even better, the company is putting up numbers similar to Nike (NYSE: NKE), but with several differences. Lulu's spectacular 91% earnings growth over the past four quarters easily outdistanced Nike's 5.5%.

The company also demonstrates better return on assets and equity, and its operating margins are astounding given its much smaller size. A small-cap competitor in the same space, Under Armour (NYSE: UA), lags in major categories as well, so not all apparel companies are cut from the same cloth. It seems that lululemon is capturing more customer interest at the moment.


Market Cap (in Billions)

Gross Margins

Operating Margin


Return on Equity

YOY Earnings Growth

lululemon athletica














Under Armour







Source: Capital IQ, a division of Standard & Poor's.

While both lululemon and Under Armour are growing quickly, I prefer lululemon, and the chart shows why. Gross margins are slightly better, but lululemon's operating margins blow away Under Armour's, meaning the former has a much better handle on corporate overhead.

And lululemon is growing faster, justifying its higher P/E. Its stunningly high ROE demonstrates that it's far more efficient at using its earnings to generate additional earnings. With no debt, $173 million of cash on hand, and trailing free cash flow of $108 million, lululemon can expand its operations using cash from operations alone. Its market cap is 8% of Nike's, and with such luscious margins, lululemon could grow that large one day if it can also become the marketing genius that Nike is.

Here's another example of why investors might want to look closely at small caps in a sector experiencing secular growth. I've also written about a similar company, Medifast (NYSE: MED), which I consider the dietary corollary of lululemon and another play on the health trend.  I expect each of these small caps to do very well going forward, with Medifast eventually becoming another Weight Watchers.

One thing's for certain: If plague zombies ever chase you, run into a lululemon store on the way to your hidey-hole. At least you'll look good while you run for your life.

Fool contributor Rick Steier owns no shares in any company mentioned. Weight Watchers is a Motley Fool Inside Value recommendation. Under Armour is a Rule Breakers selection and a Motley Fool Hidden Gems pick, and the Fool owns shares. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.