Tickers in this Article: LULU, UA, NKE, COH, ULTA, ADDYY, GPS
I am not aware of a "ring the cash register" pose in yoga, but if there is one, I have no doubt that Lululemon Athletica (Nasdaq:LULU) has mastered it. Combining a healthy living and pro-environment shtick with truly well-designed, well-crafted and well-marketed apparel, Lululemon is carving out a very successful niche in women's athletic apparel market and driving value-centered investors to distraction.

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A Limber Third Quarter
It is a real challenge to find a metric in which Lululemon did not excel in its fiscal third quarter. Revenue jumped almost 56% to $176 million, leaving the highest published estimate in the dust. Likewise, comp-store sales growth of 29% was outstanding and the company produced an eye-popping amount of productivity (nearly $2,000 in sales per gross square foot of selling space, on an annualized basis). Sure, that's less than what, say, Tiffany (NYSE:TIF) does, but they sell diamonds! Compared to other clothing retailers, even solid performers like Urban Outfitters (Nasdaq:URBN) or Limited's (NYSE:LTD) Victoria's Secret cannot come close to that level of performance.

Profitability, too, was exemplary. Gross profit improved by more than 500 basis points, while operating income doubled. Better still, Lululemon includes a cash flow statement with its report and although it lacks some detail, it at least suggests that there is nothing really wrong with the net income growth. Beyond that, metrics like inventory and payables did not look problematic. (For more, see What Is A Cash Flow Statement?)

Can Lululemon Hold This Pose?
The real trick with Lululemon is whether this kind of performance is sustainable for the long term. This company came from virtually out of nowhere (founded in 1998), and now has 130 company-owned stores. While the quality of the company's products is there, plenty of trendy retailers have enjoyed moments in the sun - Bebe (Nasdaq:BEBE), Chicos (NYSE:CHS) and Crocs (Nasdaq:CROX) - only to be eclipsed by the "next big thing". Even fellow athletic apparel maker Under Armour (NYSE:UA) has had its ups and downs.

On the other hand, the company is making a lot of logical moves. Hiring an experienced CIO should help Lululemon maintain the right kind of infrastructure (ever more critical in the retailing world). In addition, a look at the store count of companies like Williams-Sonoma (NYSE:WSM), Coach (NYSE:COH) and Ulta Salon (Nasdaq:ULTA) suggests plenty of room for expansion (allowing that these other companies are not clothing retailers, but appeal to the same sort of aesthetic and income brackets).

The two most credible threats are familiar ones in the retailing trade - competition and costs. Lululemon sources 75% of its products from China and that not only carries an optics risk, but also a cost inflation risk as China's wages go up and other companies move production to places like Vietnam. On the competition front, VF Corp (NYSE:VFC) and Gap (NYSE:GPS) are trying hard to penetrate this market, and it seems logical that Nike (NYSE:NKE), Adidas (OTC:ADDYY), Under Armour and ASICS will all want a piece as well.

The Bottom Line
This company is another example of the sort that makes old-school value mavens just grind their teeth. The stock carries very high multiples, but keeps delivering enough growth that nobody really matters. Well, maybe not nobody - the stock does have a whopping 26% short interest, so clearly there are plenty of investors willing to put their money where their mouths are it comes to calling Lululemon "overvalued".

History suggests that Lululemon will stumble at some point. The problem is that shorts can go broke waiting for that to happen, and there is clear momentum in this business. I would never pay such a rich premium to get into the cutthroat world of retail, but there is no denying that Lululemon is an attractive equity for the growth crowd. (For more, see Riding The Momentum Investing Wave.)

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