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 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

6 Ways to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

The 20 Biggest IPOs in US History

The 10 Best Places to Visit in Mexico that Are Beautiful and Safe

7 Bad Habits that Age You Beyond Your Years

The 40 Best Fortune Cookie Sayings That Will Leave You Bemused, Befuddled, or Beguiled

10 Foods to Eat Before a Workout to Make Every Drop of Sweat Count

The 5 Best Documentaries On Netflix You Must See

The Most Heartwarming and Inspirational Story Of This Halloween Season, It Will Make You Cry and Jump For Joy

10 Best Party Songs of All Time to Bring the House Down With

5 New World Order Conspiracy Theories that Will Strangle the World

The 10 Highest Rated Movies of 2014

The 10 Largest Container Shipping Companies in the World

The 10 Largest Armies in the World: Who Should We Be Afraid Of?

Best Warren Buffett Quotes on Money You Need to Hear

The 10 Highest Suicide Rates by Profession

The 20 Most Underrated Movies of All Time

The 10 Fastest Growing Companies in America

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!