A Household Name in Gated Communities

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

Whenever a stock like Lululemon Athletica (NASDAQ: LULU) begins to make headlines and draw the attention of pundits on CNBC, the same two camps advance the same two arguments that we’ve been hearing about growth stocks for years. 

The bulls claim that the company is in the early stages of growth, that its niche market can afford the company’s products, and that the value of the brand and future growth readily justify the stock’s lofty multiple.  The bears, on the other hand, scoff at the valuation, deem the product an obvious and fleeting fad, and insist holders sell their shares before taking another breath.

I’d like to bring a new perspective to the debate – or an old one, depending on your perspective.  Because plus ca change in fashion apparel, plus c’est la meme chose with stocks, which reflect the life-cycle of their evolving, underlying businesses.  Lulu, like countless clothing retailers who’ve gone before, has left the start-up and base-building phase to enter a period of rapid growth, one which could last for months or years before consumers turn away.  Problem is, as both bulls and bears will admit, when stocks like this turn, they turn abruptly, triggering many a stop and leaving true believers little time to lose their faith.  And by the time they leave the altar (with half their basis in hand), the true believers have become lifelong bears on high octane stocks.

As an investor, and as a woman who once wore Doc Martens in public, I think the keys to Lulu’s future are the durability of the brand and whether the company can translate its social cachet beyond yoga-wear into cycling and swimming – and beyond North American shores.   The history of retail provides us with examples of fashions and brands that reigned supreme for a decade then faded out like acid-washed jeans.  To illustrate, consider some popular trends in the 1990’s – an era now viewed as decidedly anti-brand.  Remember chunky heels, L.A. Gear sneakers, 'bed' head (a la Meg Ryan), and conch shell jewelery?  How about flower-embroidered denim, face and body piercing, tattoos, and Skidz plaid pants?

But perhaps even more telling is this list of 80’s wardrobe must-haves:

<table> <tbody> <tr> <td>Calvin Klein jeans</td> </tr> <tr> <td> <p>Speedo swimwear</p> </td> </tr> <tr> <td>over-sized shoulder pads</td> </tr> <tr> <td>Members Only jackets</td> </tr> <tr> <td>skinny New Wave ties</td> </tr> <tr> <td>Swatch watches</td> </tr> <tr> <td>aerobic-wear (leg-warmers, leotards)</td> </tr> <tr> <td>Ray Ban sunglasses</td> </tr> <tr> <td>underwear as outerwear (a la Madonna)</td> </tr> </tbody> </table>


Okay, so Calvin Klein (under the auspices of PVH Corp. has gone on to capture share in the designer fragrance space.  But when was the last time you saw a Speedo at the beach, or leg-warmers on anyone who wasn’t homeless?  And when did aerobics give way to jogging and roller-blading?  Did skaters take up yoga in 2010 to soothe injuries sustained in 1995?

The point is that fashions – whether in lifestyle, investing or sport – have distinct life-cycles with identifiable beginnings and ends.  Many stars must align for Lulu to become a household name on a small scale (or a household name, if you will, in gated communities).  Even if it does, what happens when yogini decide to take up Tai Chi (or spelunking or fishing or skeet-shooting)?

Perhaps the best illustration of what happens when tastes change can be found in this chart of a 1990’s icon.

<img height="294" src="/media/images/user_14298/gap-inc_large.png" width="624" />

Following a steep ascent in the late 90’s culminating in a frenzy of buying, the first sharp decline in the Gap (NYSE: GPS) takes only a couple of months.  In a little more than a year, the stock has lost 75% of its value.  Exceptionally patient investors will then wait another twelve years for the Gap’s recent, much-touted recovery.

Even today, in 2012, we see signs of a change for long-term holders of Coach  (NYSE: COH), designer clothier Guess? (NYSE: GES), and even Joseph A. Bank (NASDAQ: JOSB) – three of the greatest stories of the 2000’s.    

<img height="323" src="/media/images/user_14298/coach-inc_large.png" width="633" />

In the case of Coach, a high-end leather goods manufacturer, even the most recent quarter’s improvement in sales hasn’t halted a seven-month-long slide in the stock.  Shares of Joseph A. Bank, which derives most of its revenue from men’s business and formal apparel (a less fashion-intensive sphere), have also treaded water for most of this year.  Meanwhile, holders of Guess have become fashion victims, with the stock off almost 50% since early 2010.  Although the multiples of all of these retailers are currently undemanding, their charts may be indicating a shift in buyer behavior.  

In sum, and despite the foregoing cautionary tales, many of the reasons not to buy Lululemon shares remain stylistic and personal.  If you never buy a stock with a PEG over 1 or at price-to-cash-flow of greater than 15, then by all means, stick to the discipline that works for you.  On the other hand, if it resonates that Lulu has consistently surpassed its guidance, that management have yet to put a foot wrong, and that the company likely has several years of rapid growth ahead, perhaps it’s time to assume the posture and pick up some Lululemon shares.

Just don’t get too comfortable with your position on the yoga mat.

You just never know when aerobics will make a comeback.



webscribe has no positions in the stocks mentioned above. The Motley Fool owns shares of Coach. Motley Fool newsletter services recommend Coach, Gap, and Lululemon Athletica. 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.

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