This Clothier Takes a Bikram Pose
Marshall 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) saw a huge pull back, with its stock tumbling some 17% in a single day last week. This pullback came after CEO Christine Day announced plans to step down. However, given the company's expected growth, it appears now could be a great time to snatch up this yoga pants maker.
Bikram is known as hot yoga, which is used to flush out toxins and for loosening of tight muscles, and it appears Lululemon is taking a Bikram pose. The recent pullback is a de-stressing for the stock. Lululemon's stock is up 370% over the past five years, and with Day being such an instrumental part of this rise, it's only natural that some investors are taking this opportunity to "ring the register."
The company saw its stock tumble to below $63 back in March with the issue surrounding its Luon yoga pants recall, but quickly rebounded to over $82. Lululemon had estimated that the cost of its Luon yoga pants mishap would be $67 million, but recently announced the impact would only be $52 million. The stock is back down to $65 after the CEO announcement.
On the news, Credit Suisse cut its target from $75 to $73. Credit Suisse cited the CEO departure as the fact that the company has lost three executives over the past three months as an overall negative for the company.
Sterne Agree also took the opportunity to downgrade the company to neutral, cutting its price target from $90 down to $75. Stern Agree sees the CEO departure as threatening to the brand-cultural cohesiveness of the company. However, even a $75 price target suggests 15% upside from current levels.
Yet Day has positioned the company with a solid direction and will stay in her role until a replacement is found. Day has moved the company into running and golf apparel, as well as opened stores in Europe and Asia. International is a huge opportunity for the company, where currently, Lululemon only gets 95% of revenue from the U.S. and Canada.
Lululemon is planning to open showrooms in the vast Chinese market and already has showrooms in Germany and Singapore. Lululemon has also seen solid growth in its online retail store, accounting for 15.6% of sales during 1Q, which was a 40% increase from the year-ago period.
Two of the other major apparel companies on the market are Nike (NYSE: NKE) and Under Armour (NYSE: UA). Nike managed to post EPS of $0.73 for fiscal 3Q, compared to $0.61 for the same period last year, which was also well above the $0.67 consensus. At the end of 3Q, future orders (March to July) for Nike totaled $9.9 billion, 6% higher than orders for the same period last year.
Most know Nike for its shoes, but Nike also has a robust presence in the apparel business, with over 30% of revenue derived from apparel. The thing about Nike is that it truly has a global presence, with a geographical mix that includes deriving 60% of revenue from outside of North America. However, this does have its downside, including the impact of economic headwinds in Europe and brand re-positioning pressure in China.
Nike's balance sheet is strong, with some $2.5 billion in cash, compared to only $161 million in debt. This is good news for investors, where the company is able to throw off cash to shareholders. During its fiscal 3Q, Nike bought back 4.9 million shares through a four year $8 billion share repurchase program that was approved in September 2012.
Fast growing comp
Another major apparel company, Under Armour, managed to post EPS for 1Q of $0.07, which is half of what it posted in the prior-year's quarter. However, revenue was up 23% year-over-year and EPS beat consensus of $0.03. Also, Under Armour is seeing strength across all its major lines, where apparel revenue was up 22% year-over-year, footwear was up 27% and accessories were up 22%.
One of Under Armour's key initiatives, which is bad news for Lululemon, is that the company is looking to break into the women's active-wear market. Under Armour opened a test store targeted at women earlier this year and plans to open a second location before year's end.
Revenue is expected to be up 22% in 2012 thanks to Under Armour's rapidly expanding product line, including the launch of its Alter Ego apparel line. Other initiatives include its multi-channel distribution, where Under Armour is expanding its sales outlets beyond wholesale to direct-to-consumer via retail outlets and e-commerce. Like with Lululemon, international also presents an opportunity for Under Armour, where international sales accounts for only 6% of revenue.
Hedge fund trade
Going into 2Q, there were a total of 21 hedge fund long Lululemon, this includes billionaire Stephen Mandel's Lone Pine Capital, with a position close to $335 million (check out Mandel's consumer picks).
Meanwhile, Nike had the most robust hedge fund interest of the three with 41 hedgies long the stock. Lansdowne Partners has the largest position in the apparel company among major hedge funds, with a $760 million position and comprising 10.4% of its 13F portfolio (see Lansdowne's top picks).
Under Armour had only 20 hedge funds long the stock, which was a 43% increase from the previous quarter. Scopus Asset Management had the largest position in the stock, a $103 million position and making up 3% of its portfolio (check out Scopus' portfolio).
Despite Lululemon's recent setbacks, the company is generating returns on equity that are head-and-shoulders above its major peers.
What's more is that Lululemon also has the lowest PEG ratio, around 1.0, making the company a solid growth at a reasonable price opportunity.
Although the recent departure of Lululemon's CEO has led to a large sell-off of the stock, the long-term growth story is still intact. Now could be a great time to buy into the company. Meanwhile, Under Armour is another great story, but the valuation aspect makes Lululemon more appealing. And with a diverse product base and broad geographical diversification, it appears Nike is less of a growth story, but more a stable income play.
Lululemon has the potential to grow its sales by 10 times if it can penetrate its other markets like it has in Canada, but the competitive landscape is starting to increase. Can Lululemon fight off larger retailers and ultimately deliver huge profits for savvy investors? The Motley Fool answers these questions and more in its most in-depth Lululemon research available. Thousands have already claimed their own premium ticker coverage; gain instant access to your own by clicking here now.
Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica, Nike, and Under Armour. The Motley Fool owns shares of 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!