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

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

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

How 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

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!