One Promising Apparel Retailer for Our Portfolios
Palwasha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Recently, I discussed Lululemon Athletica’s (NASDAQ: LULU) enviable brand image that many of its competitors are thriving to achieve. It is the strong customer loyalty which makes Lululemon the valuable brand that it is today. While good luck is a factor, the moral of its success story really is ‘deliver on quality, innovation and Wall Street's earnings forecasts, and then sit back, relax or do some yoga while your stock climbs’.
But sometimes it boggles an ordinary LULU bull’s mind to see big names like Einhorn shorting the stock, for they don’t see a growth potential in active (yoga/athletic) wear industry. Maybe they overlook facts. Researchers of NPD Group revealed that active wear sales grew 9% in the U.S. alone for the 12 months ending in June, thus reaching over $30 billion in sales. Maybe we shouldn’t care what the bears think when their short interests make only 11% of the total float? Or should we?
To answer that, I'll gauge the company with a financial barometer--making a comparison with peers. But first things first, let’s determine next two fiscal years’ price target for LULU to see where it's headed. The stock closed at $65.53 yesterday, 28th of Aug. With current P/E of 47.86 and an average EPS estimate of 1.62, the expected average price target comes out to be $77.53 for fiscal year 2013. Likewise, for FY14 the avg. price target is around $98.59. That’s a return of almost 50% in just two years! (If it materializes, that is)
As for Lululemon’s ability to meet these forecasts is concerned, bear in mind that Lululemon’s conservative management has had a track record of beating estimates for at least three years straight, not missing earnings in any quarter. They did cut guidance for the next quarter but they have done that before too and have every time beaten their own estimates. The stock hasn’t been flying for any reason.
And that brings us back to the comparison of financials. LULU boasts the best profit margins and EPS growth among peers--The Gap Stores (NYSE: GPS), Under Armour (NYSE: UA) and Nike (NYSE: NKE). It is important to note here that Nike and Gap are not closely comparable competitors. Both are older stocks and the companies have more product lines including footwear, higher sales in dollar terms and a much wider international presence than Lululemon. Under Armour is a closer competitor, but basically specializes in men’s wear. Lululemon on the other hand has a bigger focus on women target market. Most of LULU's immediately comparable competitors are not publicly traded so I had to pick these three.
Consider how profit margin fell a little in the latest quarter but still remained above that of competitors. One reason for the fall is seasonality. Lululemon makes highest sales during the holiday season of fourth quarter. The first quarter after that is a little slow paced. Also, notice its EPS growth. Gap is seen fast catching up. Gap has come in one –on-one with Lululemon with its Athleta brand that offers the same range of products as Lululemon, including Lululemon’s signature yoga wear.
But even with the interesting EPS uptrend at Gap, the debt to equity ratio compared with peers makes Gap look way less attractive than lululemon which has zero D/E. Zero long term debt! Cool, eh?
Comparison of cash & cash equivalents and short term investments, as a percentage of 12 months revenue until latest quarter of each company, further highlights Lululemon as the strongest of the four. Lululemon and Under Armour don’t payout dividends. Yet, Lululemon holds way more cash on its balance sheet than does the latter.
As of the latest quarter, Lululemon has only 1 store in New Zealand, 18 in Australia, 49 in Canada and 112 in the US. That’s a total of barely 180 stores worldwide. In contrast, Gap has more than 160 stores in the US alone. Lululemon hasn’t turned its focus towards Europe and Asia yet where Nike is a big player. Nike's operations span across all six continents, barring only Antarctica (Alas! Penguins don't do sports). By contrast, Lululemon is in an early phase of expansion.
With demand running ahead of supply, a clear focus on quality yoga/athletic apparel and great opportunities of growth in emerging markets, Asia and Europe, I don’t see the LULU stock going anywhere but up.
Buy, it is!
I recommend that you do your own research before investing in Lululemon Athletica and take my article as a supplementary source of information. Disagreements are welcomed in the comments section below.
PalwashaS has no positions in the stocks mentioned above. The Motley Fool owns shares of Lululemon Athletica and Under Armour. Motley Fool newsletter services recommend 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.