You Can Still Buy This Apparel Stock

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

Lululemon Athletica (NASDAQ: LULU), a specialty retailer of yoga and fitness apparel, recently reported strong quarterly results and has proved its critics wrong yet again. The company posted strong same store sales growth of 18% (excluding the impact of currency translations), and seems to be sailing quite nicely despite challenges from rivals including Gap’s (NYSE: GPS) Athleta and Nike (NYSE: NKE). Lululemon continues to impress on EPS and beat consensus estimates for the 17th straight quarter, and there’s no reason to believe that the streak will end soon.

Going forward, investors may be concerned about Lululemon’s unusually high forward PE of 32.7. However, the company has strong sales momentum and high expected growth rate to support its premium valuation with respect to peers like Nike and Gap. For instance, if we look at the PEG ratio of these three companies,  one will notice that Lululemon is most attractively priced with respect to its growth potential and has the lowest PEG ratio (1.36, compared to Gap’s 1.56 and Nike’s 2.35).

I believe Lululemon continues to represent one of the most attractive growth stories in the softlines universe, given the company’s anticipated store unit growth rate of ~19% in FY 2013, significantly above the sector’s average of ~4%. I expect double-digit unit and square footage growth for the foreseeable future, given a small store base (stands at ~200 stores) and long term potential for more than 350 locations in North America. The company also has a large growth opportunity outside of North America, which is in the early stages of development (14 stores in Australia, 1 showroom in Hong Kong, 1 showroom in London, and 2 in Hawaii). In addition, introduction of the new concept ivviva for the younger female customers will provide additional sq. ft. growth opportunities for the company.

It is worth noting that the tremendous e-commerce opportunity will likely be fully explored before the company surpasses this mark (i.e. targeted store base of 350 in North America). Lululemon’s e-commerce business showed a tremendous 89% growth in sales, which is the highest rate of growth in the active wear or vertical retail apparel categories. Don't forget, at only ~12% of the total sales, there's still plenty of e-commerce growth ahead of the company.

Into FY 2013, I see good upside potential to the consensus EPS estimates as the company laps incremental investments into e-commerce, systems and international, providing easier comparables. While the company is targeting 15% as a short-term goal, I believe it could reach up to as much as 25% of sales longer-term, as the brand builds and given IT investments, broader international capabilities, increased web-only product, and higher inventory levels (particularly for core product).

Lululemon has multiple competitive advantages (including product innovation, scarcity model, grassroots marketing, and management), industry leading growth that is still in early innings across channels and geographies, and strong sales momentum to minimize near-term margin headwinds. The number of people participating in yoga has increased more than 45% in the last five years, and there is still a lot of growth potential in the yoga industry as a whole. Unlike other retailers, Lululemon invests in a market by establishing showrooms and ambassadors to promote the virtues of yoga as a lifestyle and the unique aspects of Lululemon’s merchandise. Thus, I believe Lululemon is positioned well to benefit immensely from the growth of yoga industry.

To sum up, I remain confident about this company due to its ability to capture the phenomenal growth potential of the yoga industry, continued strength in DTC, and healthy inventory levels to meet continued demand strength. Though the stock has appreciated more than 400% over the last three years, I suggest investors look beyond the company’s lofty valuation to the vast opportunities that lie ahead for the company. I rate it as a buy.

gauravguru has no positions in the stocks mentioned above. The Motley Fool owns shares of Nike. Motley Fool newsletter services recommend Lululemon Athletica and Nike. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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