Attention Investors, Next Stop Lululemon!!!

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

Intense competition and stressful lives have led many people to lose their health and well being. As society realizes the ill effects of such lifestyle on overall productivity, a move towards a better and stable work-life balance and the importance of physical fitness has become a top priority in people’s lives.

The result: A major market for fitness products.

Lululemon Athletica (NASDAQ: LULU) is one the major players in the sports apparel segment. The founder’s belief of yoga being an effective way to a healthy and long life coupled with an increasing participation of women in fitness related activities led to the foundation of Lululemon.

Source: Company Presentation

The last fiscal was extremely successful for the company. A revenue growth of 37% to $ 1.4 billion and a 31% growth in profits from operations marked the end of another stupendous year of growth. Cash and cash equivalents increased 44% approx. to almost $ 600 million giving the company substantial cushion for investment in new markets and expanding the product line.

The company is now working hard to establish itself in the international markets which is at the heart of their core strategy of growth and has taken active steps to enter markets in Germany, Hong Kong, Australia and UK.

First quarter of 2013 saw the company’s CEO make a sudden announcement to leave the company sending the company’s stock in a tizzy, a fall of 17% in intraday trading. This happened despite decent numbers and ending a controversy involving the quality of LUON pants owing to customer complaints about excessive sheerness of the product which forced the company to pull the product off the stands.

Despite the controversy, the company managed to deliver modest performance in the first quarter achieving a YOY revenue growth of 21% reaching $ 345 million. In addition to that, the direct to consumer sales rose an impressive 40 % to reach $ 54 million.

Moving forward as the Canadian market moves towards saturation and sales in United States decline owing to a tough economic climate and increased competition, the company is now focusing on overseas expansion and plans to boost their presence in Europe and expand in Asia and Australia targeting entry in as many as 15 new countries in the next 2 years.

A macro analysis

The good news is that the global sports apparel industry is set to grow exponentially reaching $ 125 billion by 2017, with an estimated CAGR of 6% driven not just by demand in China and India (which look set to pip North America as the world’s biggest market) but the whole APAC region.

Leaving the financials aside, a demographic analysis of countries across the globe reveals increasing awareness amongst more and more people about the importance of healthy lifestyles.

These changes provide a solid ground for future growth in revenue and profitability.

Heavyweight competition

The sports apparel industry boasts some of the biggest brands in the market. From Nike to Adidas all of whom have a global presence and strong supply chains. The sports apparel industry operates in a fragmented market with the top 10 players accounting for 25% of the total market size.

Lululemon faces significant competition from Nike, Adidas and Under Armour, each of who are major players in the global sports apparel market.

Nike (NYSE: NKE) needs no introduction, from Cricket to football, Nike’s name is ubiquitous from the world’s most popular sports to the world’s biggest athletes who don their brand.

FY 2013 saw the company wrap another year of high growth in its top and bottom line. Revenue grew at a rate of 11% (excluding currency fluctuations) to reach $ 25 billion from continuing operations driven by growth in each key category, product type and geography except Greater China.

The company has so far recorded a strong growth in upcoming orders scheduled for delivery between June and November 2013 making a total order basket of $ 12.1 billion, an 8% increment from the same period a year ago.

The sports apparel leader is now preparing for the next wave of change as it announced strategic leadership changes with the retirement of brand president Charlie Denson, the 34 year veteran of the brand, in January 2014. The current EVP of Brand and Category Management, Trevor Edwards, will become the new NIKE Brand President leading all category and geographic business units.

Moving forward, a strong presence in emerging economies, an evolving and innovative product line and fundamental financial strength make the right atmosphere for the company to move on the path of strong growth in times to come.

Adidas (NASDAQOTH: ADDYY) is another major brand in the global sports apparel market and a significant competitor in the global sports apparel market.

2012 saw the company deliver staunch financial performance. Overall group revenue increased by 6% supported by double digit growth in its retail, golf and other category businesses.

Earnings attributable to common shareholders increased 29% to € 791 million owing to an increase in operating margin to 8% and a decrease in operating working capital to sales ratio by 20%.

Come 2014 Adidas expects a record performance by the football category expecting over € 2 bilion in sales amidst the build up to one the world’s biggest sporting event “The FIFA world cup”.

As the Official Sponsor, Supplier and Licensee of the 2014 FIFA World Cup, Adidas will again supply the Official Ball of the tournament and equip officials, referees, volunteers and ball kids.

Adidas has been working aggressively and vying for the top spot as the world’s largest sports apparel brand beating fellow rival Nike and if all goes as planned and the company continues its performance that day is not far away in the company’s long history of successful growth and deliverance.

Under Armour (NYSE: UA) is another fast growing contender in the sports apparel market space. The company has been dishing out impressive results lately. The most recent quarter results have been very encouraging with the company reporting a 23 % Year-Over-Year (YOY) growth in revenue.

Under Armour has been successful in achieving a positive growth in all its revenue streams owing to continued commitment to design and innovation bringing about valuable additions to its product portfolio.

Whether it is the new and improved version of the Heatgear Sonic Baselayer or the strikingly eye-catching line of UA alter ego featuring superhero images, the company has been implementing every idea it can to promote its brand and grab greater market share.

Considering its financial performance so far in the year, the company has revised its 2013 guidance for growth in revenues and earnings from 21 % and 23 % earlier to 22% and 24 % respectively compared to 2012.

With a strong and effective marketing strategy in place the company is treading on a carefully designed path to emerge out an industry leader in the near future.

 Foolish Take

Lululemon is a significantly smaller company when compared to its bigger rivals Nike and Adidas; this however, does not put the company in a tight spot.

With a strong and consistent performance in the North American market and growth in international markets firmly on the company’s core agenda for the coming times, I believe lululemon has all the ingredients for the next phase of incredible performance and growth.

Considering the above facts and close analysis of the global industry, I rate Lululemon as one of the outperforming companies in this segment and recommend a buy rating for the stock.


Rashmi Singh 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!

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