Could there be an Apple (
AAPL
) of yoga pants, a company whose products inspire such Apple-like
esteem and loyalty that competitors are forever relegated to
lower-end snippets of the market? And if there is, should
investors buy it, at any price?
Such is the dilemma now for any investor looking at Lululemon
(
LULU
), a company that's been wildly successful selling expensive yoga
pants and the like for about five years. Investors from its 2007
IPO have near-10-fold gains, and the shares are up some 260% in
the past two years alone, as seen in the below
stock chart
. But as big-name competitors like Nike (
NKE
), Nordstrom (
JWN
) and Gap (
GPS
) line up for a direct assault, Lululemon is really going to need
Apple-like dominance to keep this up.
LULU
data by
YCharts
Lululemon's success so far comes from completely dominating
the high-end workout clothes market. It's a segment they pretty
much created with a pair of yoga pants nice enough to wear to
dinner and a reputation for making anyone's butt look good. Sales
of those pants combined with a line of equally versatile tops,
hoodies, jackets and accessories totaled $1.17 billion in the
latest 12 months, up from about $370 million three years ago.
Perhaps more importantly for investors, Lululemon's profits
grew faster. That's such a welcome anomaly among aggressive
growth stocks these days - think all those social media companies
with little or no profits - that Lululemon management has many
fans in the market. YCharts Pro gives it strong marks for
fundamentals.
LULU Revenue TTM
data by
YCharts
Recently though, retailers with lots of cash have gone all-in
to compete with Lululemon's products. Gap is opening Athleta
stores and targeting the same crowd. Nordstrom has a similar
line. Nike and Under Armour (
UA
), which already keep potential customers away from Lululemon on
the running side of the business, are doing everything they can
to steal away Lulu's yoga fans. The vast majority of these
products are priced just enough cheaper than Lululemon to look
like bargains but maintain high-end status.
Lululemon is alarmed enough by the knock-off threat to sue
several companies for patent infringement -- how Apple-like. (PVH
Corp's Calvin Klein, and manufacturer G-III Apparel Group Ltd).
But if the competition is hurting Lululemon's bottom line, it's
hard to see yet. The company upped its forecasts earlier this
month. Sales at comparable stores next quarter are expected to
mark gains from the low to mid-teens; diluted earnings per share
are expected to rise some 33%. It was this recent earnings report
that upped valuations on Lululemon shares back into the
stratosphere just as investors began questioning whether yoga
pants could really be worth so much.
LULU PE Ratio
data by
YCharts
LULU PE Ratio
data by
YCharts
Continuing high valuations -- the Lululemon
PE ratio
hovers around 50 -- led a couple of enthusiastic buyers of the
stock to back off to hold ratings this year, noting that
competition, as well as general economic weakness in the U.S.,
could slow growth. (It's a Canadian company with stores only in
North America, Australia and New Zealand.) Unlike its
competitors, Lululemon's future is much more reliant on one,
possibly faddish, sport. Many followers do have faith in the
company's ability to adapt early to trends, and slightly less
than half the analysts that follow it still have buy
recommendations on the shares.
The problem for Lululemon investors is simply the expectation
- years on end of very high growth - its share price suggests. At
these levels, management could do everything right and still see
the shares hit by selling when there are problems beyond its
control, like when investors get worried about the market or the
economy generally. That is, unless it really is the Apple of its
world.
Dee Gill is an editor for the
YCharts Pro Investor Service
which includes professional
stock charts
,
stock ratings
and
portfolio strategies
.