Downward Dog No, Alpha Dog Yes
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Legal briefs and yoga pants are all the rage now. Lululemon Athletica (NASDAQ: LULU) is suing the pants off Calvin Klein (part of Philips Van Heusen) and the manufacturer, G-III Apparel, quite literally, for violating three design patents on its “Astro” yoga pant line. This is significant because protecting design patents is extraordinarily difficult with knock-off manufacturers and imitators thinking they can just ‘tweak’ a design and blithely go about their profitable business.
Calvin Klein and others may have thought, ‘Lululemon, they’re Canadian, so nice and polite, they won’t mind if we just fiddle about with their designs. They’re a yoga wear company and they’ll just take this lying down (in the Relaxation Pose). Well, no Downward Dog for Lululemon; they’re Alpha Dog and growling and biting all comers.
This is cheering for Lululemon investors because protecting the name and design patents is key to staying on top in their niche and it’s great PR for Lululemon in the fashion world. Already defendant Calvin Klein has deleted the targeted styles from its e-commerce site. This is no Pyrrhic victory; this is a big win for Lululemon as it puts all those competitors on notice, “We will not be tweaked with.”
And Lululemon is seeing competitors lurking about. Nike has women’s yoga pants on its website but they’re called training pants. As I mentioned in a post earlier this summer, carried one style that was horizontally striped. Who could possibly look good in that? Now, the striped yoga pants are gone. Could it be they listened to me? Now, the training pants only come in up to three solid colors.
Gap (NYSE: GPS) is a more serious competitor with its Athleta line but it doesn’t have as large a bricks and mortar presence as Lululemon with only 23 Athleta stores in the US but six more will open this fall. Lululemon, with 112 stores in the US and 42 in Canada, has a strong loyal customer base as well as the trademarked ‘anti-stink’ fabric technology. Athleta stores offer the classes and community involvement that draw customers to Lululemon but Lululemon works it even more with its ‘point of contact’ wholesale channel direct to yoga studios, health clubs and fitness centers.
Lululemon is reporting second quarter earnings on September 7. It closed at $65.19 before Labor Day and is down almost 20% from its 52 week high of $81.09. The P/E has come down to 47.93 but that is more than twice as high as Gap’s P/E of 19.96 and Gap has a yield of 1.40%. The forward P/E for Lululemon is 31.45 so earnings are expected to rise higher, sort of like the Sun Salutation.
What About Grrr-owth
Lululemon has ambitious growth plans having opened its London showroom during the Olympics and expects to almost triple the amount of U.S. stores and add almost 20% more stores in Canada. Another thing to keep in mind is that Gap and Nike are much older companies, Gap founded in 1969 and Nike in 1964. Lululemon is only 14 years old, just a teenager starting its growth spurt. Lululemon is also ahead of the curve with its e-commerce site (I highly recommend you check it out) contributing outsized growth in revenue, up more than double year over year. The site is a superior commerce driver as it has informative blogs and videos and notices on upcoming classes and community events.
Gap has $1.61 Billion in total debt to $2.11 Billion in total cash but Lululemon has no debt. The quarterly revenue growth is 53.00% year over year and quarterly earnings growth is 39.80% yoy. Be aware that 25.40% of the float is short.
One thing I’ve noticed is that the merchandise at Lululemon keeps being called pricey yet Nike and Athleta are not much cheaper. Online, the basic style of yoga pant is $88.00 with free shipping and it’s possible to obtain some styles for $59.00 from the “We Made Too Much” clearance link. At Athleta a similar style is $79.00 with free shipping over $50.00. Nike training pants with Dri-Fit technology go for $70.00 but its plain vanilla choices aren’t very appealing. Also, Lululemon keeps being called a women's yoga pants maker but it offers men's wear, running and bicycling athletic wear as well as accessories, shirts, sports bras, hoodies and so on.
How To Position Yourself
Maybe you don’t know your asanas from your elbow. You really don’t need to. Lululemon is just at the beginning of a multi-year and multinational growth surge. It has no debt. The P/E is likely to come down and most importantly, the company is aggressively defending its patents. If Lululemon gets put in the doghouse after earnings it’s an opportunity to pick up this growing Alpha dog.
leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of Lululemon Athletica. Motley Fool newsletter services recommend Lululemon Athletica. 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.If you have questions about this post or the Fool’s blog network, click here for information.