Weighing Lululemon's Expansion Plans
Nathaniel 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) shares have tumbled 20% since the company reported strong first-quarter earnings last week. The decline stems from the announcement that the innovative chief executive officer, Christine Day, will be leaving her post in the near future. In the days following the announcement a slew of analysts downgraded the stock, citing fears of a growth slowdown following Day's departure.
Last Thursday, Lululemon participated in a William Blair conference in Chicago where management reiterated the company's growth potential. Day caught the Street a little off guard when she mentioned the company's aggressive plans to expand its men's business. As of late the company has seen strength out of this segment, which has led the management to pursue the thought of rolling out standalone men's stores in addition to traditional stores by 2016. Should management follow through with these plans, the company would dramatically increase its direct competition with apparel giants Nike (NYSE: NKE) and Under Armour (NYSE: UA).
Up to this point, Lululemon generates roughly 15% of its revenue from its men's line. In addition to traditional workout apparel, the company has offered men luxury underwear and golf apparel, which have helped drive men's same-store sales higher than that of the rest of the business.
Going forward, I am concerned that the company will quickly exhaust its customer base. When I take a step back and ask what is Lululemon, my first thoughts are that sexy, propped up, upside down horseshoe. I am concerned the company will never be able to shake its sexy and feminine image, which it would need to do in order to pull off the general men's category. I frequent the gym almost everyday, I played competitive golf throughout my slightly younger days, and I could never imagine paying $48 for performance underwear when I can get a three-pack at Target for $9. This is investing and analysis needs to be very complex right? But I would simply feel emasculate wearing Lululemon to the gym; it's my Foolish opinion that i'm not alone either.
Nike through its array of different stores already has established a presence across the country. When you compare the product offerings, you see that Lululemon charges about 50% more for basic workout staples. On Nike's website you can buy a workout tank top for $22, while a very similar tank from Lululemon costs about $44, a 100% jump. Nike has worked hard to establish its image, and any growth seen by Lululemon will come in large part at the expense of Nike. I would rather see investors choose Nike as the company that has already established itself as a global leader with a more diversified product line.
Nike Golf is starting to see signs of life again. Nike has a strong portfolio of golfers, including greats Tiger Woods and Rory McIlroy. I doubt Lululemon will be able to have a meaningful breakthough in the golf industry, as the company can't attract or afford the best talent at this time.
If you take a look at Nike on a valuation basis you will see a high valuation, but a valuation far lower than that of Lululemon. Nike trades at 2.2 times this year's revenue, while Lululemon trades at almost three times that number. Additionally, on a forward multiple basis, Nike trades at a 40% discount.
On to Under Armour. The company has come a long way since its early days as a spandex-shirt company. It has worked hard to develop a diverse product portfolio with exposure to nearly all aspects of the sporting-goods sector. As of late the company has looked to differentiate its brand through technology. Under Armour is working to make its line of scent and temperature-control products more mainstream.
Shares trade at a rich multiple as a result of the company's unheard of earnings growth of over 120% last quarter alone. On a forward multiple basis, we see shares trading at 41 times next year's earnings. At this time, it looks like Under Armour is fairly valued. The PEG ratio is over 2 and shares trade at analysts' price targets. Going forward, the company should continue its focus on arranging mainstream sponsorship agreements. If the company wants to make a bigger dent in the golf industry specifically, it should look to offer fabric technology designed for golfers.
Foolish wrap up
While a focus on its men's line could potentially be lucrative, I doubt Lululemon will gain significant market share. I don't believe the majority of men feel comfortable using a product so strongly associated with the opposite gender. How successful would L Brands be if it decided to open a standalone men's underwear store?
Lululemon has a great thing going. Instead of focusing on its men's division, the company should look to further leverage its brand across the entire women's apparel industry. Yes, Nike does have only half the estimated growth of Lululemon but trades at a 40% discount based on a forward price-to-earnings ratio. Take the swoosh over the horseshoe.
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.
Nathaniel Matherson 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!