Harley-Davidson, Inc. (HOG), Lululemon Athletica inc. (LULU): The Oddest Couple in the Market

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Both Harley-Davidson and Lululemon offer introductions to riding and yoga with free rides and free yoga classes at their retail outlets. Both have well-designed e-commerce sites that are both informative and entertaining. And both reach out to their communities: Harley with its aforementioned events and Lululemon with yoga ambassadors in their retail communities, fun runs like Sea Wheeze, expecting 10,000 runners this August, and more. This exhilarating zeal to convert new adherents to the cause is the common thread (pun intended) between these two.

Exhilarating could describe Lululemon’s stock price surge since it IPOd in 2007. On Jan. 14, the company updated its guidance for Q4 higher and CEO Christine Day announced margins were expanding and clean inventory coming into 2013. Their Q3 earnings report on Dec. 6 was notable for direct-to-consumer revenues climbing 89% and same store sales comps increasing 18%. As of the Q3 report they had $439.4 million in free cash and 201 stores in North America and Australia with plenty of room to expand.

Of course, no hero is perfect. Harley-Davidson has more total debt than one would like at $5.10 billion to total cash of $1.20 billion but that yield is at a sustainable payout ratio of 23%. Also, as listed on the 10-K its products are pricier than privately held competitors but the Harley cachet is still unassailable.

Stir in a Little Rivalry

Similarly, Lululemon apparel is slightly more aspirational than numerous competitors but its performance is what people pay up for. Lululemon is also a slightly pricey stock with a P/E of 41.39 and a PEG of 1.34. It also has a rival (ooh, romantic tension here) for investors’ affections in NIKE, Inc. (NYSE:NKE), which too was founded by an enthusiast, this time of running. Its corporate culture encourages all things running and athletic.

Although Nike has a yield of 1.50% and a lower P/E of 24.58, its gross margin underperforms that of Lululemon, 42.62% to 55.38%. Lululemon is also expected to grow much faster going forward than Nike especially with its expansion into three sports and offerings for men. Lululemon’s web business is a huge driver as well. Nike may be somewhat overvalued here with a higher PEG than Lululemon of 1.99.

The Thrilling Climax

Both Harley and Lulu are committed to freedom, self-growth, and community involvement. Both are names associated with a quality performance brand and both want to spread the word about their respective passions.  Passion is what these two really have in common. (Sob, where’s my hanky?) While Harley-Davidson’s rough around the edges image is something they’re trying to overcome (and that debt, too) delicate Lululemon’s feminine image is beefing up with more male practitioners and more sports.  Either one is a match made in heaven for a portfolio.

The article The Oddest Couple in the Market originally appeared on Fool.com and is written by AnnaLisa Kraft.

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