Shares of upscale athletic apparel retailer Lululemon (LULU: Charts, News, Offers) have been on fire since last August, nearly tripling in half a year. The company has been unstoppable, becoming a darling of Wall Street analysts, who have touted it as Nike (NKE: Charts, News, Offers) for a new generation. The company is now taking advantage of the hype by announcing a 2-for-1 stock split, which will increase its common stock from 200 million shares to 400 million shares. Its preferred Special Voting Stock will also undergo a split, increasing from 30 million to 60 million shares. The split is widely expected to pass shareholder approval during the annual meeting scheduled for June 8, 2011. The stock split is mainly a psychological strategy intended to attract small investors who may believe that the stock has been overbought and expensive at current levels above $90 per share. Should investors buy into the hype surrounding Lululemon, or wait for a pullback to establish a more attractive entry point?
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The company certainly has the numbers to back up the hype – it recently posted fourth quarter earnings of 64 cents per share, a 60% increase over the 40 cents it posted last year, and far ahead the Wall Street consensus of 57 cents per share. For fiscal 2011 the company expects $900 million in revenue. The company attributed its rapid growth to improving margins and strong top-line growth, coupled with efficient management and small but profitable stores, which reduce inventory and real estate costs. The market has been enamored with Lululemon because of its staggering growth, in an industry which usually only posts earnings growth in the teens. At its current price, Lululemon’s market cap has grown to 4.69 billion, and is outgrowing its small chain image to compete with multinational corporations such as Nike. Smaller competitors with similar growth trajectories, such as Under Armour (UA: Charts, News, Offers), are also a threat to the company.
Lululemon, which is based in Vancouver, Canada, has carved out a niche in the highly competitive retail apparel market with its high priced yoga-inspired apparel, with athletic pants which average at $100 a pair. The company is focused on young and affluent urban professionals, and is primarily based in wealthy urban centers such as San Francisco, Los Angeles, New York and Vancouver. The company has a small international presence, with 130 stores across the United States, Canada and Australia. The company intends to open 25 new stores in 2011. Lululemon has intentionally kept its stores compact to save on real estate and inventory costs, yet has the highest sales per square foot compared to all its industry peers, which include major retail players such as Gap (GPS: Charts, News, Offers) and J.Crew. The stores also offer free yoga classes, intended to create a community within the store and generate free publicity. Lululemon has created an experience which mirrors what Starbucks did for coffee. Lululemon is still relatively unknown outside its urban centers, and the company is working to remedy this through its extensive e-commerce business, and it still has room to grow as more customers of the $15 billion women’s athletic apparel industry take notice. Just as Nike started with shoes and expanded into other athletic products, Lululemon has the potential to extend its brand to other athletic lines.
That’s not to say that it’s all clear skies ahead for Lululemon. Just as Nike’s shares slid dramatically after it announced cost pressures due to rising commodity and material costs, Lululemon expects higher costs from air freight and additional investments in fuel-hungry shipping options to meet increasing demand – its current inventory is considered to be too small to meet consumer demand in 2011. The company hopes to increase its e-commerce channel in order to offset some of the load. In addition, several competitors have caught wind of Lululemon’s yoga-inspired craze and offered their own similar products. Gap has now opened its first Athleta store, which looks suspiciously like a less pricey version of Lululemon, and Nike, Adidas and Under Armour have all increased their yoga apparel selection. The company is not immune to imitation, and there are relatively low barriers to competition. Lofty expectations may also work against the share price – with a forward P/E of 36, the company has some mighty high expectations to meet this quarter, and shareholders can expect the shares to fall drastically if it misses.
Other News About LULU
Demand for Lululemon gear outpaces inventory
Lululemon may have to spend more on shipping and production.
Lululemon Announces Stock Split
Lululemon’s high-priced shares split in anticipation for growth.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
