4 Mistaken Reasons to Sell Lululemon Athletica inc. (LULU)

Page 1 of 2

Since   went public in 2007, the stock has faced relentless skepticism regarding its growth strategy and ability to fend off competitors. More recently, bears prematurely started their victory laps when management provided less-than-stellar earnings guidance.

Memo to shorts: Lululemon Athletica inc. (NASDAQ:LULU)’s fundamentals are in great shape, and the stock isn’t as expensive as you make it out to be.

Let’s walk through the bears' thesis, and break down their argument point by point.

Lululemon Athletica inc. (NASDAQ:LULU)Expansion Risks

Bear argument: Lululemon has little brand recognition internationally, and expansion efforts will likely be unsuccessful.

Lululemon has the human and financial resources in place to execute its growth strategy.

CEO Christine Day is one of the best executives in retail. Before taking over the yoga apparel company in 2008, Day served a 20-year tenure Starbucks, where she led the company’s successful Asian expansion. Day has a knack for fostering loyal customer relationships and strong corporate cultures.

The company also boasts a clean balance sheet with no long-term debt. Growth is financed entirely through cash flows from operations, ensuring Lululemon has the financial flexibility needed for expansion.

Slowing Growth

Bear argument: Lululemon’s same-store sales growth is falling, and the company is close to saturating the North American market.

Ultimately, management's conservative guidance has reset the market's expectations lower, which could set up the stock for an earnings beat in upcoming quarters.

Lululemon has the potential to deliver respectable high-single-digit same-store sales growth with product line expansions into men’s apparel, children’s clothing, and road cycling equipment. Lululemon also continues to innovate with new products and fabrics which will continue to drive sales.

In addition, Lululemon still has lots of growth runway in the United States. Assuming the company can penetrate the U.S. market to a same degree it has in Canada, Lululemon has room to more than triple its U.S. store count.

Falling Margins

Bear argument: Lululemon’s gross margins are threatened by new players encroaching on the company's lurcative niche.

Lululemon does face new competitive threats.

Under Armour Inc (NYSE:UA) and NIKE, Inc. (NYSE:NKE) recently entered the yoga apparel space, aggressively undercutting Lululemon's prices by 20%-30%. Both companies have been able to enter the market quickly by taking advantage of their large distribution networks rather than building entirely new retail outlets from scratch. These efforts appear to be paying off, with both companies reporting 25% growth in their women's active-wear segments.

The Gap Inc. (NYSE:GPS) is also making inroads. In 2008, the company acquired catalog and e-tailer Athleta for $150 million to extend its position in the women’s active-wear market. As of the company's third quarter, Gap operated 30 Athleta stores reporting $89 million in sales.This represents less than 3% of Gap's total revenue, and compares to a $317 million top-line figure Lululemon reported over the same period. By fiscal year-end 2012, Gap plans to operate 50 Athleta locations and also projects 30% year-over-year revenue growth.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 30 percentage points in 13 months Learn how!

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!