What Makes Lululemon, Lululemon?
Palwasha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you’re a hardcore yogi (addressing female readers here), it is hard to imagine that you won’t recognize the symbolic ‘A’ that looks more like the Greek letter ‘ohm’, etched/printed on the back of your yoga instructor or gym partner’s workout bra. Yep, I’m talking about the iconic Lululemon (NASDAQ: LULU) logo. As for the unfortunate men, whose wives/girlfriends haven’t gifted them a Lululemon sweatshirt or pair of pants yet, you can get one on your own from their website. But if you’re looking for a stock advice on the company, you’ve come to the right place.
In narrow terms, Lululemon Athletica (NASDAQ: LULU) is a yoga-inspired athletic apparel company. But the Canadian company goes as far as to describe itself as "a company that has helped people to live a longer, healthier and fun life". Don’t twitch that eyebrow! This isn’t a wrong statement altogether, maybe just a little exaggerated, but not wrong.
The company, which initially catered to women alone, has now entered men's market as well. Lululemon also owns the Ivivva Athletica brand exclusively designed for active young girls—dancers, ice-skaters, gymnasts, runners. The Canadian company, which now boasts a strong foothold in the US, is also being seen expanding into Australia, New Zealand, UK and Hong Kong.
But the question posed in the headline remains unanswered. What really makes Lululemon the more desirable (read: pricier) of all athletic-wear stocks like Nike (NYSE: NKE), The Gap (NYSE: GPS) and Under Armour (NYSE: UA)? (Notice in the chart below how it has outperformed all the competitors and even the Dow Jones, Nasdaq and S&P 500 Index)
Is it the eye-popping revenue growth that beats all of its competitors or is it the non-existent long term debt account on its balance sheet that gives the company a zero debt to equity ratio and gives the common shareholders a sigh of relief?
If you ask me, it’s neither. While the strong financials are definitely tempting, there’s an underlying force that’s driving these financials that we need to look at first. It is coincidently the same driving force that makes Apple (NASDAQ: AAPL), Apple.
That answers it.
Brand loyalty is what makes Lululemon, Lululemon. Brand loyalty is what helps the two companies to attract customers, despite cheaper alternatives available in the market. They don't achieve it on the basis of providing customers with convenience of making purchases, offering cheaper bargains or being sole-sellers of the product with not enough substitutes, but on the basis of consumer's love for the brand! Just like Apple, buying a Lululemon product doesn’t mean you're just buying the brand, you're actually buying a status. Unabashedly, the two brands have now become a status symbol!
Despite the fact that Lululemon sells the most expensive athletic wear, it beats competitors like DA Active with Lululemon look-and-feel-alike products, The Gap Athleta (NYSE: GPS) with a bigger international presence and Victoria’s Secrets Yoga line that too has a strong brand image. To some, this may sound like a Luluhead’s wishful rhetoric based on personal liking for the company, but I’ve got reasons to support it. Without getting into financial analytics, I’ll prove below what makes this company eye-candy and its stock a must-have.
LULU’s Economic Moat
Innovation beyond innovation: What really sets Lululemon apart from its competitors is 'research' at the company. Lululemon takes first hand feedback from certified yoga instructors and athletes who truly know the clothing needs of buyers. And not just feedback, the company also takes valuable input on research from them. Plus, no other competitor displays its fabric line with so much detail on their website as Lululemon. Lululemon has a whole universe of its registered fabrics and the quality and innovation is unmatchable. For instance, LULU’s silverescent® family of fabrics has silver fibers sewn in tops that inhibit bad odor-causing bacterial growth. It lets you sweat with no fear of turning off people around you. There are numerous other fast wicking fabric kinds and the good thing about them is that even after all the stretches, twists and turns, the fabric doesn’t bag out. Not just fabrics but you also see the products as being very innovative. Lululemon has introduced the ‘ponytail hood’ for young girls to its Ivivva brand that has a ponytail holder and keeps hair off the back of neck. They’ve also introduced built-in hand warmers to uppers that can be tucked in or taken out as needed. The ‘education’ tab on the company’s website lets you get familiar with the complete range of fabrics, product lines and terminologies you need to know. Unlike other companies, a Lululemon buyer is a fully informed buyer and the transparency makes the company all the more attractive despite premium pricing.
Customer service: Even if you’re not the kind who’d check out a website before heading out to make the purchase from their brick-and-mortar store, the staff at the store will make sure you’re informed of all necessary details before you take your picks. The staff at Lululemon is extremely friendly and makes you feel comfortable while you shop. On average, Lululemon has received better reviews on review websites like Yelp than many other competitors.
No compromise on quality: If you look at the revenue growth chart I shared above, you’ll notice how Lululemon is the one company that recovered fastest from the last recession (part of the graph in grey). How did it manage to achieve that? According to LULU’s CEO, while competitors were cutting down on costs during the recession, Lululemon didn’t compromise on quality. Even through the recession, Lululemon continued to invest on uniqueness of its fabric kind and quality, and that paid off. By the time the recession was over, LULU was back on the track, growing sales with leaps and bounds.
Individual exclusivity: Believe it or not but buying an off-the-shelf Lululemon product is equivalent to getting a tailor-made garment. The company gives you complimentary hemming for any purchase and for as long as you hold it. Doesn’t matter how old the purchase. They make complimentary adjustments with changes in your figure so that the garment perfectly fits your body curves as if it was made especially for you.
Community participation: The Company attracts prospective buyers via weekly complimentary dance/yoga classes held at its stores. Occasionally, it holds large yoga events where renowned athletes mingle with the public and instill in them the need for a healthier lifestyle. Lululemon also invests in training its store staff and educators who coach Lululemon visitors with basic personal development tools.
Employer Branding: The yoga apparel company has also kept competitors at their feet by building a company that employees want and love to work for. It offers numerous perks to full and part time employees, including paying for their yoga classes. With the competition getting fierce, LULU’s CEO upped salaries of her store staff to retain them, whose training the company has greatly invested in. LULU incurred employee costs of $11.1 million in the latest quarter due to increased labor hours associated with new and existing stores as well as an increase in wages. One can judge the company's consciousness towards its employees from the following words taken from 'company history' on its website.
“Our goal was to train our people so well that they could in fact positively influence their families, communities and the people walking into our stores. Although the initial goal was to only have one store, it was soon obvious that to provide a fulfilling life of growth, family, salary and mortgage for our amazing staff, we would have to provide more opportunities. It was really a matter of grow or die because active minds need a challenge.”
A lot of new competition has sprouted up and Lululemon has recently made a move to get some of its designs patented to secure its market share. The move looks a lot like the Apple vs. Samsung patent war, which initially made Apple's win seem questionable. But you never know with the jury. Win or no win, just like you can’t compare a Mercedes with a Ford, Toyota or Honda, you can’t compare a Lululemon with a Gap Athleta, Victoria’s Secrets or an Under Armour. Only a loyalist knows the true worth of a brand.
If you’re still unsure of the business, I’d next compare Lululemon’s financials with competitors to show if it really is a good buy. Stay tuned for more on that!
PalwashaS has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Lululemon Athletica, 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.If you have questions about this post or the Fool’s blog network, click here for information.