The Oddest Couple in the Market
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Think of the standard Hollywood "meet cute" rom-com, tough biker guy meets mellow yoga girl. What could they possibly have in common? Ninety minutes of misunderstandings and hilarity ensue. Motorcycle manufacturer Harley-Davidson (NYSE: HOG), meet yoga and athletic apparel maker Lululemon Athletica (NASDAQ: LULU). Both companies encourage an all-encompassing lifestyle and both have been on a tear in the last few years.
Slight digression but bear with me. On a trip to a Caribbean island, I noticed two large signs in the Customs waiting area. One said, Welcome Visitors but was dwarfed by a much larger sign, Welcome Home, Belongers. This craving and need to belong to a group of kindred spirits is what has driven the success of both companies. Especially, in the case of Harley-Davidson, which was faced with increasing Japanese competition in the 1980s and imminent bankruptcy after management bought the company back from AMF in 1982. Harley-Davidson has grown its company promoted Harley Owners Group to over a million members worldwide since 1983 and raised the Harley hog to cult status.
In the corporate parking lot at Milwaukee headquarters, signs prominently exhort No Cages (biker translation: no cars that box you in). An overwhelming number of employees are Harley owners and riders. It's not the kind of corporate culture that sees customers as a distant faceless populace but more a "we are them and they are us" mentality.
Never Lonely Again
The Harley Owners Group started in 1983 is a big part of that. Buying a Harley is an entree into a world of social events including fish frys, ladies garage nights, men's motorcycle boot camps, charity events with live music, food, and prizes, rallies, clubs, and motorcycle parades. A Harley rider need never be lonely. Kickstands up!
This culture of belonging is one the company has tried to make more and more inclusive -- reaching out to women, Latinos (calling themselves Harlistas) and younger men to broaden their current customer base of more affluent (household income over $89,500) Caucasian men over 35. As described in the latest 10-K, this is how the company has grown its share price from just above $10 in 2009 to quintuple to a multi-year high of $54.62 on Jan. 28.
The forward P/E is 13.10 with a .98 PEG. The company recently raised its dividend by 35% for a current yield of 1.60%. Harley was founded in 1903 and like any good Midwestern company has low corporate risk on all metrics. The company operates in two separately managed divisions: Motorcycles and Related Products and the Financial Services division, which offers financing and insurance and other point of sale products for Harley buyers.
Harley & Lulu
Actually sounds like a cute chick flick, doesn't it. But seriously, what does our hero Harley have in common with Lulu? Lululemon was also founded by an enthusiast, Chip Wilson, who after finding yoga as thrilling as surfboarding and surfing (really?!) started making workout apparel using stink-free and stretchy, more comfortable fabrics. The company continues to explore more functional fabrics as it extends its line to runners, swimmers, and bicyclists.
Both Harley-Davidson and Lululemon offer introductions to riding and yoga with free rides and free yoga classes at their retail outlets. Both have well-designed e-commerce sites that are both informative and entertaining. And both reach out to their communities: Harley with its aforementioned events and Lululemon with yoga ambassadors in their retail communities, fun runs like Sea Wheeze, expecting 10,000 runners this August, and more. This exhilarating zeal to convert new adherents to the cause is the common thread (pun intended) between these two.
Exhilarating could describe Lululemon's stock price surge since it IPOd in 2007. On Jan. 14, the company updated its guidance for Q4 higher and CEO Christine Day announced margins were expanding and clean inventory coming into 2013. Their Q3 earnings report on Dec. 6 was notable for direct-to-consumer revenues climbing 89% and same store sales comps increasing 18%. As of the Q3 report they had $439.4 million in free cash and 201 stores in North America and Australia with plenty of room to expand.
Of course, no hero is perfect. Harley-Davidson has more total debt than one would like at $5.10 billion to total cash of $1.20 billion but that yield is at a sustainable payout ratio of 23%. Also, as listed on the 10-K its products are pricier than privately held competitors but the Harley cachet is still unassailable.
Stir in a Little Rivalry
Similarly, Lululemon apparel is slightly more aspirational than numerous competitors but its performance is what people pay up for. Lululemon is also a slightly pricey stock with a P/E of 41.39 and a PEG of 1.34. It also has a rival (ooh, romantic tension here) for investors' affections in Nike (NYSE: NKE), which too was founded by an enthusiast, this time of running. Its corporate culture encourages all things running and athletic.
Although Nike has a yield of 1.50% and a lower P/E of 24.58, its gross margin underperforms that of Lululemon, 42.62% to 55.38%. Lululemon is also expected to grow much faster going forward than Nike especially with its expansion into three sports and offerings for men. Lululemon's web business is a huge driver as well. Nike may be somewhat overvalued here with a higher PEG than Lululemon of 1.99.
The Thrilling Climax
Both Harley and Lulu are committed to freedom, self-growth, and community involvement. Both are names associated with a quality performance brand and both want to spread the word about their respective passions. Passion is what these two really have in common. (Sob, where's my hanky?) While Harley-Davidson's rough around the edges image is something they're trying to overcome (and that debt, too) delicate Lululemon's feminine image is beefing up with more male practitioners and more sports. Either one is a match made in heaven for a portfolio.
leglamp has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica and Nike. The Motley Fool owns shares of 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!