Nordstrom and Lululemon - Picking the Best Deal

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

Nordstrom (NYSE: JWN) has a great reputation for customer service, which is very important for this retailer to maintain because it sells clothing to upscale shoppers. At a price to earnings ratio of 16.82, investors expect some growth from the company, but not as much as they expect from yoga clothing retailer Lululemon (NASDAQ: LULU) at 58.30. Both companies have benefited from the stronger market for high-end clothing recently, and Lululemon showed the strongest growth, which is reflected in its stock price. Of course, Nordstrom is a bigger company and it has sold clothing for a lot longer.

I visited Nordstrom's Facebook page to see how the retailer currently manages its relationships with its customers. I immediately noticed that a few of the customers asked questions about the company's products and future plans to sell goods in various countries, and Nordstrom representatives responded almost immediately. This may look like a minor factor, but many corporate executives still do not understand social media's advantages and disadvantages. When a retailer allows shoppers to post messages on its wall, it exposes itself to major publicity problems if shoppers complain, but it may benefit greatly if shoppers see that the company pays attention to their questions.

Visiting Lululemon's page, I noticed that the company's popularity has risen quickly. Nordstrom has more than 1,300,000 fans, and Lululemon has over 500,000. Fans don't translate directly to sales, as some of Nordstrom's customers may not heavily use Facebook. The Facebook fan count comparison comes out in Lululemon's favor, because it is a smaller company than Nordstrom. With more than 10 times Lululemon's revenue, Nordstrom doesn't have 10 times as many Facebook fans.  Lululemon reported annual revenue of $711 million when it released its 10-K in 2011, while Nordstrom reported $9.7 billion revenue for fiscal 2010. Both companies improved their revenue figures from the previous year, in which Nordstrom reported $8.6 billion and Lululemon reported $453 billion in revenue.

Nordstrom sells a wide variety of upscale clothing and products, while Lululemon built its reputation on yoga clothing. Lululemon's rapid growth coincided with the increasing popularity of yoga in the United States and Canada. Although Lululemon does plan to diversify, a decline in yoga's appeal would severely hurt the company's sales, and it would not set back Nordstrom as much. A buy for Lululemon right now is a buy for yoga.

The companies' market caps don't differ as widely right now, with Lululemon at $9.5 billion and Nordstrom at $11 billion. Although Lululemon seems like a promising company, this valuation seems excessive. Saks (NYSE: SKS), with a price to earnings ratio of 24.67, also sells products to luxury shoppers. Saks reported $2.8 billion in revenue when it released its 10K in 2011, and it has a $1.7 billion market cap. Saks' revenue fluctuated over the past few years, and it lost money in two recent years, although its last annual statement showed a return to profitability. As all three of these retailers can benefit if shoppers purchase more luxury clothing, including yoga apparel. I suggest buying Nordstrom and Saks stock to capitalize on this trend and holding off on Lululemon.

Motley Fool newsletter services recommend Lululemon Athletica. The Motley Fool owns shares of Lululemon Athletica. enovinson has no positions in the stocks mentioned above. 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.

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