Who's The Apple of Apparel?
AnnaLisa 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) just reported on December 6 and once again knocked Mr. Market's socks off. The company trades at a 44.95 P/E but a recent Yoga Journal study finding that 20 million Americans now do yoga and 82% of them are women should help Lululemon whittle down that pooch of a P/E in no time. These regular earnings beats are just one reason Lululemon is like Apple (NASDAQ: AAPL) .
An Ever Growing Market
The Yoga Journal article points out that the 20 million number is an increase of 29% since 2008 and 44% of the people questioned not currently practicing yoga are what they call "aspirational yogis" who are interested in starting. With New Year's around the corner and the ever-popular resolution to get fit many of those aspirational yogis may "just do it" in the words of competitor Nike (NYSE: NKE). This New Year effect was mentioned on the call as CEO Christine Day said they expected a strong response from back-to-gym and back-to-studio products released in January.
With store count at 201, that leaves plenty of room to expand domestically and internationally. The company has bright prospects with two successful showrooms in Hong Kong and a search for real estate for a store there and in Singapore. After that fourteen more countries in Europe and Asia are expected to host Lululemon stores.
Like Apple, Lululemon gives very conservative guidance as Fool Jeremy Bowman points out on Lululemon's earnings highlights. CFO John E. Currie called for $475-$480 million holiday revenues and growth of less than 10%. For the third quarter they outperformed guidance with double digit growth in EPS, now standing at $0.39 from Q3 2011's $0.27 and revenue of $316 million.
After those lovely Q3 earnings an analyst upgrade came from Credit Suisse to Outperform with a new price target of $86. E-commerce was specifically mentioned in the earnings call with a rise of 89% in online sales from the year ago period.
Teach a Man To Downward Dog
One similarity to Apple is customer education offering free yoga classes at their stores taught by "Ambassadors," local yoga teachers that embody the Lululemon lifestyle as they call it. Of course, students can browse the stores afterward and buy. This teach a man to fish strategy has worked well for Apple, Whole Foods, Cabela's, and Williams-Sonoma.
CEO Christine Day mentioned community engagement on the Q3 call enumerating the grand opening of the new store on the Upper West Side in NYC featuring a Gospel Of Sweat event and a grand opening in Columbus, OH called Om-H-I-O with 500 yogis inside the Ohio State University oval.
While Apple stores are buzzing and lively Lululemon stores attract customers in their own way with their clean, sleek, but serene interiors. Lululemon will likely never make the thousands of dollars per square foot in sales that Apple does and it will never be the biggest cap stock (not unless every human on the planet starts practicing yoga!) but it's early in its growth trajectory and a momentum name having moved from a few dollars per share to a high of $81.09. From its IPO in 2007 it's up 385.86%.
Apple of course has been vigilant over the years in protecting and defending its patents and so is Lululemon as it just recently settled an action against Calvin Klein and G-III over an infringement of its Astro Pant. Details of the outcome were not released on the call.
Like Apple, Lululemon keeps innovating and recently introduced a line called "what the fluff?" which features 800-fill down and ventilation for warmer winter wear. They also just created a new position in the company called Head of Innovations and hired Dr. Tom Waller to oversee new technical fabrics and constructions. CEO Day in answer to analyst questions about R&D costs that,"Our goal is to always innovate while hitting the target we've laid out."
Lululemon is perceived as a high-end product like Apple, although their prices are not significantly higher than rival Nike, Under Armour or Gap's Athleta lines. What they do better than their competitors is try to engender a similar ecosystem of loyalty with yogis then buying the non-exercise related items and non-yoga clothes like the bike to business clothes for both men and women.
Apple has a huge cash horde and Lululemon, too, is in a healthy cash position with no debt. CEO Day announced on the call plans to build up the cash reserve and to facilitate an aggressive expansion plan and still be "comfortable" with it. She added they eventually want to implement a dividend and the matter comes up at every board meeting.
Competition is fierce in sports apparel and Under Armour Inc (NYSE: UA) with its functional sports lines similar to Lululemon is the Google to their Apple. But as I've pointed out before the mindset between their customers is quite different and the Lululemon patron is less competitive and responds better to the more collaborative and individualistic image of Lululemon. Under Armour's P/E is actually higher than Lululemon's at 47.49. As for Nike its yoga options are minimal and its competition with Lululemon going forward will be on the run, swim, and bike lines.
The final similarity is a concern over decelerating growth and slowing innovation. Lululemon is innovating quarter after quarter and the new hire for Head of Innovation is encouraging. As for decelerating growth their addressable market is nowhere near saturated and the company still expects to keep gross margins near 55%. Going forward the company also expects to expand the men's offerings as well as the run, swim and bike lines.
The Final Takeaway
Can you buy Lululemon here? Like Apple, it's off from its 52 week high and has doubters with a 20.40% short interest. But this is a multi-year trend in yoga adoption and Lululemon is also expanding its offerings into other sports as well as expanding internationally. As I've said about Apple, Lululemon is a name to buy on any weakness. Namaste!
leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Nike, and Under Armour. Motley Fool newsletter services recommend Apple, Lululemon Athletica, Nike, 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!