This article is part of our Rising Star Portfolios series.
When I bought lululemon athletica
Fellow Fool Rick Munarriz covered the basics of the fourth quarter last week, but I want to add some color from management's conference call.
The inventory story
The biggest takeaway for me was inventory -- or rather the lack of it. The company couldn't keep product on the shelves, it seems. CFO John Currie said that by the end of February, "we were basically selling fumes." CEO Christine Day joked, "I'm ready to sell my personal closet. We can't get enough."
I realize there could be a negative takeaway here with management's inability to forecast demand, but this is certainly far better than the alternative. Sales and profit would have been even higher if lululemon could have met demand.
Best foot forward
Most important, this bodes well for the long-term outlook. New stores that opened in Tennessee, Georgia, and Ohio are absolutely cracking. Who would have known Clevelanders were rocking yoga before Browns games?
As my colleague Ilan Moscovitz points out, lululemon is absolutely dominant among retailers in sales per square foot. Gap
With the supply-and-demand ratio a bit askew, lululemon had a very limited number of markdowns, which was partly responsible for record gross (58.5%) and operating (29%) margins in the fourth quarter. That's as good as it's going to get in the short term; operating margin will likely remain nearer the 25% figure the company achieved for the full year.
Online engine gears up
There is usually so much short-term noise surrounding earnings reports that it's hard to keep focused on the long term. But let's refer back to my original buy recommendation and the four growth catalysts I listed that could really drive long-term growth:
- Expansion beyond the company's core yoga base.
- Expansion beyond women's wear.
- International expansion.
- Online sales.
This conference call had plenty of positive info about online sales. Last quarter, management said that e-commerce had accounted for about 7% of sales to that point in the fiscal year, up from 1% in 2008. In the fourth quarter, that has risen to 10% of sales, and Day says to expect 10% for all of 2011. Her midterm goal is 15%, and I think that should be easily achievable given that the company is completely overhauling its e-commerce platform and should soon be stocking up on "perpetually under-inventoried" levels.
Striking the pose
And so, my fellow Fools, let's take a deep breath through our noses and review the past few months. I bought shares of the stock over two months ago, and continued learning more about it. (Exhale slowly.) Earnings rolled around, and after reviewing the numbers and listening to the conference call, I see the business is firing on all cylinders and is validating my buy thesis.
It's time to buy some more. Tomorrow I'll be adding another $500 worth, giving me a "full position" in my port, or roughly 5% of the $17,000 total available to me the first year. Though it won't be common, I'll always have the option of super-sizing any position by adding a bit more later.
If you're following along, be sure to review how lululemon (risky, great potential) fits in with the more stable stocks in my portfolio -- and try to keep the same percentages with your own holdings. Questions? Hit me up on my discussion board and follow me on Twitter.
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Fool analyst Rex Moore has never been to a yoga class, but owns shares of lululemon. lululemon and Under Armour are Motley Fool Rule Breakers picks. Under Armour is a Motley Fool Hidden Gems recommendation. The Fool owns shares of lululemon and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.