3 Areas to Watch With Lululemon Athletica inc. (LULU)

Shares of Lululemon Atheltica inc. (NASDAQ:LULU) have been relatively stable over the last few weeks as the stock seems to have settled into a holding pattern with earnings due in March. Investors may be asking if the yoga outfitter can keep up its rapid growth and maintain its fat margins as competition heats up. To help answer those questions, we’ve isolated three key factors below, taken from our premium research report, that should determine its future success:

The 3 areas you must watch

1. Same-store sales
Always a widely watched statistic in retail, comparable sales (i.e., same-store sales or comps) are especially important for a fast grower like Lululemon. Higher same-store sales are the most profitable form of new sales because they don’t require as large a capital investment as opening a new store. If the apparel chain can keep its enviable same-store sales growth, investors should reap the benefits. The chart below shows recent figures of comparable-store sales growth:

Lululemon Athletica inc. (NASDAQ:LULU)

Quarter Same-store sales
Q2 2012 15%
Q1 2012 25%
Q4 2011 26%
Q3 2011 16%
Q2 2011 20%
Q1 2011 16%

Source: Earnings releases.

Lululemon’s comps have fluctuated significantly over the last six quarters, and at a minimum of 15%, growth has been remarkably strong. By comparison, high-single-digit comps are generally considered impressive in retail. If the apparel maker can stay within this range, shares should continue to climb. If comps start to flag into the single-digit range, look for investors to flee. Relatedly, shareholders will want to watch direct-to-consumer sales, as strong growth in that area could take away from same-store sales.

2. International expansion
Just as Lululemon’s current valuation assumes that its strong same-store sales growth will continue, it also implies there are hundreds more store openings in the company’s future. The expansion will depend on its ability to reach foreign markets with the same gusto it’s had in North America. With showrooms now open in London and Hong Kong, the company is just dipping its toes in these huge international markets.

Lululemon’s London showroom opened in April and appears to be well-received, with high ratings on Yelp Inc (NYSE:YELP) and over 1,700 “likes” on its Facebook Inc (NASDAQ:FB) page. The Hong Kong showroom opened in May, and according to CEO Christine Day, “customers had come from all over Southeast Asia to buy in bulk,” a likely sign of pent-up demand.

In 2008, the company pulled the plug on its Japanese venture, closing three stores in that nation so it could focus on North American expansion. That experience should provide a few lessons for management as it steps up its international presence.