Like any good Canadian, I watched an incredible amount of television coverage of the Vancouver Winter Olympics. While tuning into NBC's Today Show one morning they made mention of Lululemon (Nasdaq:LULU), Canada's contribution to athletic apparel. Its stock is on quite the ride, up 300% in the last year as investors bet the Vancouver-based retailer will continue to grow. It might do so, but before you bet the farm on spandex-like jogging pants, you might want to decipher its cross-border sales to determine if its growth is real or imaginary.
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Why So Secret
Lululemon continues to do most of its business north of the border. In the third quarter ended November 2, 2009, 61% of its sales were Canadian with the remainder coming from its U.S. stores. Overall, the company delivered fantastic results. Revenues grew by 30% to $112.9 million and same-store sales jumped 10% in constant dollars. There's not much to argue with there. In terms of new stores, it opened one in Canada and nine in the U.S. in the last 12 months. They've generated $12 million in revenue in the first nine-months of fiscal 2010. So far so good. The problem lies in its reporting of revenues. Why does it go to the trouble of providing investors with a geographic sales breakdown (61% Canadian, 39% U.S.) but then doesn't get into the specifics? Could it be that it doesn't want investors to know that its U.S. stores are far less productive? You better believe it.

Others Do It
Highlighting the fact that the exact same store in America is 40-45% less productive than in Canada isn't what investors want to hear. Yet other companies do exactly that it in an effort to provide retail investors with greater transparency. Tim Horton's (NYSE:THI) breaks down its financial information both by U.S. and Canadian stores but also by corporate and franchise ownership. This despite the fact its U.S. operations are barely making money and contributing less than 10% of its overall revenue. Another example is Limited (NYSE:LTD), whose Bath & Body Works concept operates stores on both sides of the border. While it doesn't provide a breakdown between the two countries, it does provide sales per square foot and other performance-related information that makes the division unnecessary.

In Need of Honesty
The point is, when they have a growing number of stores in the United States, Lululemon should provide details beyond listing store locations by state, but actually go into the specifics. Sure, you can figure out the sales per square feet for both countries with a little work, but how many people are going to do so. Canadians are supposed to be honest and forthright. Lululemon should detail the differences explaining why they exist and how this situation will change over time. In terms of investor relations, Lululemon fails miserably. (To learn how to analyze retail stocks, refer to Analyzing Retail Stocks.)

Bottom Line
RBC Capital Markets analyst Howard Tubin defends Lululemon's less productive American stores suggesting sales topping $1,000 a square foot company-wide is a good problem to have and "... would be very hesitant to bet against Lululemon right now given the opportunities for positive developments ahead." A compelling argument that in my opinion fails to consider the worst-case scenario, one in which Nike (NYSE:NKE), Under Armour (NYSE:UA) and VF's (NYSE:VFC) Lucy brand successfully challenges the company's product line while continuing to underperform in the critical U.S. market.

The road is littered with failed Canadian expansion efforts south of the border. Then again, if the company did a better job connecting the dots, Mr. Tubin's enthusiasm might be more understandable. (For further analysis on Lululemon, check out A Closer Look At Lululemon's Numbers.)

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Tickers in this Article: LULU, THI, LTD, NKE, UA, VFC

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