Haters Will Hate, But Have a Little Faith

Palwasha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A Forbes article I read yesterday that shed a bearish outlook on Canada-based athletic apparel retailer, lululemon athletica (NASDAQ: LULU), compelled me to come to the company's rescue. This article came out on the same day that LULU reported its third quarter earnings. To the bears' surprise, lululemon beats analyst forecasts--again! It was already previewed that this beat was coming. Third quarter EPS of $0.39 and revenues of $316.5 million beat respective estimates by $0.02 and $11 million. However, ending the third consecutive excellent quarter this year, LULU's conservative management yet again cut down on future guidance, keeping company forecasts low. Nothing new for those who've held this stock long enough to know how its management works, but the Forbes writer thinks that lululemon's 'best days are behind it' and cites five reasons for it. Here's my take on each;

1. Competiton: The writer says, 'Lululemon doesn’t have a sustainable competitive advantage, as it has no barriers to entry to keep the competition out.' Oh, so, to have a sustainable competitive advantage you need to have high barriers to block competitors from recreating what you offer? Did I get that right? But which industry would have lesser barriers to entry than the online social media industry that requires little to no capital investment? Yet we see Facebook maintaining its stronghold despite Google+, Twitter, Pinterest and a dozen others trying hard to over take it. Barriers to entry don't define your competitive advantage, after all.

What makes lululemon, lululemon is its brand image that it has achieved over a long period of direct community participation, superior quality products and R&D investment in its fabrics. And let's get it right, lululemon is not just a yoga-apparel retailer anymore. The brand now includes a whole range of products for athletes and dancers and even casual wear for routine work outs. Just like Nike (NYSE: NKE) and Gap (NYSE: GPS) are rivals in this same market, it doesn't mean good days are over for one or the other because they've got each other to compete with. Monopoly stagnates your position. Competition inspires growth.

2. The Cooling Off Effect: The writer next attributes lululemon's sales success to a 'craze that fades away'. While there's no denying the fact that such a phenomenon will eventually occur, however later than sooner. At least the company's revenue growth trend post-the great recession (shaded in grey), when compared to its competitors, confirms my thesis that the company is still in its growth phase--going global, expanding to new markets, employing new ways to attract customers, introducing new product lines and all this, unlike its competitors, without any formal advertising expenses or boost from celebrity endorsements.

<img src="http://media.ycharts.com/charts/c8086b13ff0c59445effffcde4921656.png" />

NKE Revenue Quarterly YoY Growth data by YCharts

3. Market Saturation: The writer contends the bulls saying, 'not every lady on earth is going to fall for the yoga craze and shop for new gear every other week.' Correct, if only the company catered to yogis alone. Secondly, athletic apparel may not be a perishable item (like, food) or a routine necessity (like, fuel, toothpaste or your telephone/internet connection) used/bought after short intervals, but it's still not a big ticket item (car, house, Mac, DSLR) bought once in a decade. Demand for it may be intermittent but it's still recurrent. The market for lululemon may mature in 5-10 years time, but while the company is still in its growth phase, the market looks raw at the moment.

4. Insider Selling: The writer makes a technical error here by quoting insider selling to be amounting to over 7 million shares in the last six months. He mistakenly uses the figure for institutional selling. The actual year-to-date insider selling amounts to a little over four hundred thousand shares, not even close to half a million, at an average price of $74.02. A forward P/E of 40.42 and a consensus mean EPS estimate for the full fiscal year 2013 of $1.82 give the stock a fair price of $73.56. Being an insider doesn't mean you can't benefit from 'buying low, selling high.' Nonetheless, I agree with a grain of salt that the stock has seen a strong selling activity and has 15% of its float short. 

5. A Weak Economy: A weak economy does affect sales of all luxury retailers alike but, much like after every boom comes a bust, after every bust comes a boom. But as long as the financials look good, the key is to have a little faith in your purchase.

Q3: Quick Recap

LULU's total net revenues in the third quarter rose 37.5% from $230.2 million in the third quarter of yesteryear. Comparable store sales grew 18%, or 26% if you include ecommerce sales. The company's ecommerce/direct-to-consumer sales channel saw a stellar growth of 89%, generating $45.1 million in revenues. Revenues from this channel accounted for 14.3% of total revenues versus only 10.4% in the same quarter last year. Expect good news to continue to come from this segment as the company has launched and continues to launch international country-specific websites. Management had guided in the second quarter about its plan to also open 8 new brick-and-mortar stores in Q3, which it successfully did. Eight company-owned stores were opened in the US, 3 in Australia and 1 ivivva store (a subsidiary of lululemon dedicated to its younger female target market) in Canada. Management plans to open 8 more stores in the US, 1 in Canada and 1 in Australia during the fourth quarter.

Stay put!


PalwashaS has no positions in the stocks mentioned above. The Motley Fool owns shares of Nike. Motley Fool newsletter services recommend Lululemon Athletica and 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!

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