Can Lululemon Shares Keep Levitating?

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Some yogic traditions claim that mystical levitation can occur during higher levels of consciousness, and there are many stories about such things among believers of eastern spiritualism and new age philosophies. Lululemon (NASDAQ: LULU) does not promise a levitation experience for its clients, but shares of this company clearly look like they can defy the law of gravity.

This retailer of high end yoga apparel was founded in 1998 after its founder Dennis Wilson came out of a yoga class; the company opened its first store in 2000 and went public in 2007. Since them, shares of Lululemon have been steadily rising and rewarding investors with extraordinary returns, as we can see from the chart that compares Lululemon with the S&P 500 Index.

 

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This outstanding performance doesn´t come from a mystical dilution, the numbers are very real and financial performance at Lululemon has been a big surprise for the non believers; the company has been increasing sales at an average of more than 40% annually for the last five years, while earnings per share have increased from $0.06 in 2007 to $1.27 in the last twelve months.

And there is no slowdown in sight; revenues for the last quarter ended in January 2012 grew by a 51.4%, fueled by a 26% increase in comparable store sales. Earnings per share were $0.51 for the quarter, in comparison to $0.38 for the same quarter in the year before.

How does Lululemon do it?

The company is clearly nontraditional when it comes to marketing strategy, corporate culture and customer experience. Lululemon´s success cannot be understood without considering these important particularities.

It´s not just about the quality of the designs or fabrics used, which are very appreciated by customers, Lululemon is famous for keeping inventories at very low levels, avoiding big discounts and maintaining new store openings at a contained rhythm. Scarcity creates value, and the company knows how to manage those variables.

There is also a very important cultural element in Lululemon, the company´s mission statement is “to elevate the world from mediocrity to greatness”. Both clients and employees have a strong sense of belonging and shared values. Free yoga classes, different self improvement philosophies and a strong network of personal relations are a central aspect of the company´s values.

Lululemon´s manifesto has been very popular among people related to the company and its brand, and it´s clearly centered on strong cultural, philosophical and spiritual values.

 

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Even during the company´s latest earnings release the press report was based on comments that are not the typical business centered topics we usually hear about:

Christine Day, Lululemon's CEO, stated: "Reaching a billion dollars in revenue is clearly an important milestone that as a company we can all be very proud of. But far more important than the number itself are the beliefs, values, culture and people that achieved it. We really are so much more than our numbers; it is the everyday actions of our dedicated team that translates into an unparalleled guest experience and allows us to achieve our ultimate goal of elevating the world."

Lululemon is clearly a very special company, but its valuation is already reflecting an optimistic scenario for the future, it trades at a Forward P/E ratio above 35 which is much higher that the valuations carried by other companies in the industry. Needless to say, its growth prospects are much higher too.

Nike (NYSE: NKE), which is a more mature company, is trading at a forward P/E below 19. Analysts are on average expecting a 28.5% annual increase in earnings for Lululemon for the next five years, versus a 12.7% estimated for Nike. The PEG ratio, which calculates Price / Earnings adjusted for growth expectations, is 2 for Lululemon and 1.8 for Nike, so even considering its higher growth potential Lululemon looks pricey.

On the other hand, if the company keeps performing like in the past it could clearly exceed growth expectations. International markets offer a lot of expansion potential if the products are well received there, and new product categories like apparel for men, running, swimming and other sport disciplines look interesting.

Patience and contemplation are some of the values that yogic traditions propose, so is keeping an open mind for the different opportunities the future may bring. Lululemon deserves some credit, and the company is worth watching in case it can successfully launch another growth stage through geographical expansion and new product categories.


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