One Lulu Of A Deal

If you're looking for bargains in the retail industry, you might want to consider Lululemon (Nasdaq:LULU), the Vancouver-based active wear company. Much ballyhooed in the press for its commitment to yoga, it has grown dramatically since its beginnings in 1998. While skeptical of the company's new age approach to retail, and in spite of its affluent (read trendy) clientèle, its current stock price has me wondering whether it's time to come down from my lofty, opinionated perch and embrace the potential of this still-growing retailer. Down 81% in the last 52 weeks and sitting just above its all-time low, this one-time $60 stock has to be a good deal right now, doesn't it?

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Sales Per Square Feet Still Sweet
Despite a recessionary economy, Lululemon managed to generate $1,705 in sales per square foot at its 107 stores in the first nine months of fiscal 2008. This compares favorably with handbag superstar Coach (NYSE:COH), which averaged $1,240 in sales per square foot at its North American stores in 2008. Coach is one of the best retailers going, so for Lululemon to have better numbers is a testament to its power as a lifestyle brand. With the exception of 2007, this past year was its best yet in terms of sales per square foot. Considering the circumstances, this is quite an accomplishment.

Same Store Sales Positive
Lululemon's same store sales growth for the nine months ended November 2, 2008 were up 13% year-over-year from the same period in 2007. Granted, this doesn't compare to Buckle's (NYSE:BKE) 23.7% increase in same store sales for the same 39-week period, but it is better than most. In its third quarter earnings release on December 11, CEO Christine Day, formerly President of Starbucks' (Nasdaq:SBUX) Asia Pacific Group, indicated that Lululemon's earnings in the coming quarters would be lower than previously expected, but that the company should remain profitable. On that news, the stock dropped 30%, closing the day around $7.28; it has fallen another 25% or so since. I would think that most of the bad news in 2009 is already factored into the price of the stock, but I guess we'll see for sure on April 1 when Lululemon announces Q4 earnings.

Analysts Seem To Like It
In January, several analysts went on record stating that Lululemon was making some good moves to keep the company moving forward despite the terrible retail environment. Sharon Zackfia of William Blair & Company believes that Lululemon's decision to launch its e-commerce site at the beginning of 2009, as opposed to last fall, will enable it to sell the extra inventory it accumulated that was originally intended for new stores. To achieve online success, its retail stores obtained over one million email addresses in 2008 for the launch. With only five stores scheduled to open in 2009 (compared to 35 in 2008), the company is clearly focusing on getting the best long-term lease agreements that it can, which will help profitably down the road - when growth returns.

Healthy Balance Sheet
Here you have a company with no debt and 75 cents per share in cash. Like most retailers, Lululemon is scaling back spending in 2009, choosing to focus on improving its gross margins, expanding its product lines, building its e-commerce platform and readying itself for further growth in 2010 and beyond. (To learn more about gross margins, be sure to read The Bottom Line On Margins.)

Bottom Line
Retail giant Gap (NYSE:GPS) bought online active wear retailer Athleta for $150 million this past September. Apparently, Lululemon considered buying the e-commerce company, but instead opted to go it alone, creating a site from scratch. Personally, I'm glad they didn't make the buy because the debt and cash that would have gone to acquiring Athleta would have left it more vulnerable when sales slow in 2009. This way, Lululemon can wait for the best retail locations to come available and, in the meantime, perfect its business. At $60, I didn't like Lululemon's stock. But at $5 and change? I'm a definite fan. (Explore stocks from this sector further in our related article Analyzing Retail Stocks.)