By any reasonable standards, lululemon athletica (Nasdaq:LULU) has been a fantastic stock over the past two years. Not only has it tripled in value since its debut, but investors who loaded up on these shares in a big way in early 2009 are also looking at a 10-bagger or better. An investor only needs to hit a couple of those in a lifetime to do very well indeed.

But the big question is whether lululemon can maintain the momentum. Everything looks great for the company today, but grizzled retailing investors have seen stories like lululemon before and unfortunately, many of these stories do not have happy endings. (For background reading, see Analyzing Retail Stocks.)

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A Solid End to the Fiscal Year
For a company with a track record of blowing away estimates, lululemon's fiscal fourth quarter results were surprising only to a certain degree. Revenue jumped 53% and surpassed the top end of the analyst range, helped in large part by comp-store growth of 28%. Direct-to-customer sales growth was also strong (up 152%), but still constitutes a fairly low percentage of sales.

LULU once again coupled strong sales with impressive operating leverage. Gross margin jumped almost five full points, and the company's operating income grew 72%. LULU has exceptional operating margins for the retail sector - they're at 29% (up from just under 26% a year ago) - and the company once again delivered earnings per share well in excess of analyst expectations. (For more insight, see The Bottom Line On Margins.)

Can It Continue? The "Yes" Side
Trading at around nine times sales and over 30 times EBITDA, it is clear that there are incredible expectations built into this stock price. That said, LULU may have the most attractive demographic firmly in its sights; personal spending peaks for in the 30- to 40-year age range, and women tend to spend more on clothing than men.

Not only does lululemon target this top retailing demographic, but the company's store base is far from its saturation point. Whether Ulta Salon (Nasdaq:ULTA) and Coach (NYSE:COH) are good comps (on the basis of attracting similar clientèle) or whether companies like bebe (Nasdaq:BEBE) and Gap (NYSE:GPS) can be thrown into the mix, LULU certainly has more room to open stores across the country and those new stores should drive sales expansion.

On top of all of that, LULU has built some brand value and established attractive price points for its merchandise. Not only is the company enjoying growth, it's also enjoying profitable growth.

Can It Continue? The "No" Arguments
As good as things are going for LULU today, plenty of retailers have had moments in the sun only to slow down significantly or fade away entirely.

Athletic apparel is a competitive niche and it is only a matter of time before Gap, VF Corp (NYSE:VFC), Nike (NYSE:NKE) and the like move more aggressively to get a piece of the business. While LULU may think it has a unique combination of style, quality and construction, there has never been an idea in retailing that remained truly unique for long.

What's more, the company may be more vulnerable on price than it realizes. The firm sources a lot of its product from China, where labor costs are rising. Moreover, lower-priced goods from a company like H&M (OTC:HNNMY) may not bleed off the core LULU shopper, but cheaper competitors could commandeer those marginal consumers who care more about value than brand.

Lululemon is also going to find that the weight of expectation only gets heavier with time. Mature retail concepts just do not maintain the sort of operating and free cash flow margins that LULU has today. Perhaps the bulls will be right and LULU will be the exception, but investing on the basis of "it's different this time" rarely works, and this company's reversion to the mean could be painful.

The Bottom Line
Even allowing that Lululemon can more than double sales in five years and maintain industry-leading free cash flow yields, the stock seems stretched. A desperate retailer or clothing company may try to buy growth and take out LULU, but it looks like the company will be hard pressed to justify today's stock price with any sort of reasonable projections for free cash flow over the next decade. (For more, see The Value Investor's Handbook.)

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