When you have a name like Lululemon Athletica inc. (NASDAQ:LULU), it’s easy for investors to misunderstand what’s going on. For a while, it seemed everyone referred to this company as a yoga clothing company and believed it would never be anything more. In recent months, the company’s trouble with production quality has left a question mark around the shares. However, for investors willing to give management the benefit of the doubt, there’s no question that Lululemon Athletica inc. (NASDAQ:LULU) still looks like a great growth story.
218 Is a Very Important Number
Investors who believe in the Lululemon story should constantly be repeating to themselves the number 218. This is the approximate number of total stores in operation under the Lululemon Athletica inc. (NASDAQ:LULU) name brand.
Though the company’s quality issues over the last few months can’t be understated, clearly customers are still buying Lululemon products at a fast pace. In the most recent quarter, the company reported revenue up 21%, on the back of a comparable store sales increase of 7%. While diluted EPS was flat, this should be attributed more to the company’s challenges with current production than with any long-term issue.
With just 218 locations in the company’s product line not widely distributed, Lululemon Athletica inc. (NASDAQ:LULU) has a long road of growth ahead of it. When you look at the company’s competition, the most obvious name that comes to mind is Under Armour Inc (NYSE:UA). The challenge that Under Armour Inc (NYSE:UA) faces is trying to convince Lululemon’s largely female clientele that the company’s products are made with them in mind.
Another challenge that Lululemon faces is the lack of distribution that a competitor such as NIKE, Inc. (NYSE:NKE) already possesses. In fact, I would make the argument that Lululemon Athletica inc. (NASDAQ:LULU)’s management needs to begin conversing with companies such as Dicks Sporting Goods Inc (NYSE:DKS) to begin to broaden the company’s distribution platform, so that Lululemon can go head-to-head with both NIKE, Inc. (NYSE:NKE) and Under Armour.
Why Should Lululemon Change?
To be quite blunt, one reason that Lululemon should consider a broader distribution strategy is because the company beats its competitors in a head-to-head competition every time. For instance, the company carries the best gross margin of its peers at 49.4%. By comparison, Under Armour commands a gross margin of 45.9%, Nike carries a gross margin of 44.22%, and the traditional retailer Dicks Sporting Goods Inc (NYSE:DKS) could use a boost to their gross margin of 30.87%.
Part of the reason that Lululemon Athletica inc. (NASDAQ:LULU) has better margins is because they are very efficient at managing their inventory levels. A traditional retailer such as Dicks Sporting Goods Inc (NYSE:DKS) may choose to carry a higher level of inventory relative to sales to try and avoid an out of stock situation. In this company’s last quarter, their inventory on the balance sheet relative to current quarter sales was 98.43%.