This is a big day for my multivitamin portfolio, as I've finally settled on our first smaller company. I'll tell you more about why the other candidates didn't make the cut in my next article, but today I want to focus on the winner: lululemon athletica
The business
If you haven't yet heard of lululemon or seen the distinctive red-and-white logo bouncing around in a yoga class or on the running trail, it's just a matter of time. This company with the funny name makes high-quality athletic apparel and sells it at premium prices.
Founded in 1998 in Canada by surfer, skater, and snowboarder Chip Wilson, lululemon has expanded to 134 corporate-owned and franchise stores. Wilson and his team have instituted a very smart growth strategy through the use of showrooms, which are a "cozier version" of the full retail stores. This allows management to assess a location's potential and open full-fledged stores only where the brand is well-known and sales are strong.
lululemon's culture is amazing and extends to the communities around the stores. Employees are encouraged to hike, bike, or run to work, and they can attend exercise classes at the company's expense. The stores sponsor exercise classes and runs, and identify "ambassadors" in the community who embody the lululemon lifestyle. All this has resulted in a loyal fan base that has a grass-roots feel about it.
Why I'm buying
Like all my buys, I'm taking a long-term view with this purchase. This sub-$5 billion company has a lot of room to run, and while there will be hiccups along the way, I think it can become one of the great retail brands of the next 10 years.
Current growth rates are outstanding. Net revenue for the latest quarter was up 56% from the year-ago period, and same-store sales rose 29%. Average annual growth over the last three years, which includes the dark days of the recession, are similar, with revenue averaging 42% and net income 77%.
These rates will naturally decline over time, but I see four catalysts that will keep growth healthy over the next decade:
1. Expansion beyond the company's core yoga base. lululemon got where it is today largely through yoga sales, but running apparel already accounts for about 20% of revenue. Management also has its eyes on dance, gymnastics, and really anything that makes us sweat.
2. Expansion beyond women's wear. Men's apparel currently accounts for only about 10% of the business. The company still views itself as primarily a women's retailer, but my feel from the latest conference call is that management will slowly and safely build out the men's line over the coming years.
3. International expansion. While there's still plenty of room for U.S. growth, international expansion is already happening. There are 11 corporate-owned stores in Australia. There's a showroom in Hong Kong that's showing good results. There's promise in Europe based on online sales. Speaking of which ...
4. Online sales. The in-store experience will continue to be the great growth driver, but let's not forget that Internet thing. This "increasingly substantial" part of the business accounted for about 7% of sales so far this fiscal year, up from 1% in 2008.
The competition
It's tempting to compare lululemon to Under Armour
|
Company |
Market Cap (millions) |
Revenue Growth (TTM) |
Earnings Growth (TTM) |
ROE |
Net Margin |
Forward P/E |
|---|---|---|---|---|---|---|
| lululemon | $4,757 | 58% | 134% | 37% | 15% | 41.4 |
| Under Armour | $2,731 | 21% | 52% | 14% | 6% | 35.9 |
|
Nike |
$39,969 | 8% | 38% | 21% | 10% | 17.6 |
| Adidas | $12,847 | 10% | 107% | 15% | 5% | NA |
|
Gap |
$12,601 | 4% | 20% | 26% | 8% | 10.9 |
|
bebe |
$473 | (10%) | NM | (1%) | 0% | 44.7 |
Source: Capital IQ. ROE = Return on equity.
There's no other way to spin it; lululemon is an outstanding company. It stands up well to every competitor in almost every respect, even in items I didn't include in the table. Yes, it's also selling at a premium to the other companies, but deservedly so.
Risks
My risk analysis of lululemon centers on issues that could derail growth -- thus compressing the stock's lofty multiples (and, naturally, its price). Two things to worry about are: (1) fickle fashion fans who sometimes turn away from a brand very quickly, and (2) another economic crisis that could deter folks from paying, oh, $58 for a "foundation tank" made from four-way stretch silverescent luon -- even if it does offer wicking and anti-stink properties.
I think these risks are mitigated by the loyal, grass-roots customer base. However, it's worth noting that even though the business itself held up relatively well during the recession, the stock suffered more than an 80% drop from late 2007 to early 2009.
Get your lemon on!
I'm more than happy to see the financial media deride lululemon and call it just another overvalued fad. Many are scared of this stock because they're not looking past the surface and into the many growth drivers available to the business in the coming years. As Fool co-founder David Gardner eloquently states, a high P/E ratio is nothing to be afraid of in and of itself. Often it points to a deserving company in the beginning stages of a long growth story.
This is a risky stock, but it fits in nicely with the rest of my multivitamin portfolio, where I'm committing 30% to small- and mid-cap companies. I'm aiming to eventually fill out a full position, or 5% of my portfolio, with lululemon. I'll buy half tomorrow, and look to add more after I watch the company for a while and assess its next earnings report.
The best way to follow me, lululemon, and the rest of my multivitamin portfolio is via Twitter. You can also check things out on my discussion board.
