"Pay for performance" has long been a mantra on Wall Street, and it's a little harder to condemn athletic apparel maker lululemon athletica (Nasdaq:LULU) for its valuation when it continues to perform as well as it does. Not only does the company continue to move truly impressive quantities of premium-priced merchandise, but the company's cautious inventory and expansion philosophies mitigate some of the normal retailing risks. All of that said, investors aren't getting any bargains in these shares.

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Another Good Quarter in the Hopper
Not surprisingly, lululemon once again set a bar for performance that virtually no other retailer is going to meet or beat. Moreover, with the Christmas selling season and international expansion both looking solid, there's no reason to think that growth is about to stop.

Revenue rose 37% this quarter, as lululemon saw an 89% jump in direct sales on top of an 18% comp growth. With most analyst expectations clustering in the low-to-mid teens, it was another solid performance for this leading aspirational brand.

Margin performance was not quite as impressive, and some investors may be disappointed in the magnitude of outperformance. Gross margin eased off about 40 basis points (BPS) from last year, but did improve 30 BPS sequentially despite a more concerted effort to keep in-stock levels higher. Operating income rose 35% as the company lost the same 40 BPS in operating margin as gross margin from last year, but saw 70 BPS of sequential improvement.

Competition Trying to Catch up While Lululemon Looks to Lengthen Its Stride
Lululemon has been quite deliberate about its expansion plans - frustratingly so for many investors who would favor a more aggressive approach. Nevertheless, it seems like management is motivated by a very clear focus on preserving the value of the brand and the customer experience (or said differently, "let's not screw up the great thing we have.").

That said, the company is moving on. New product assortments in areas like dance, biking and hiking seem to be getting a good reception, as are extensions into men's and youth categories. Lululemon is also starting to look abroad as a future growth-driver; a good move if the performance of companies like PVH (NYSE:PVH), Oxford Industries (NYSE:OXM) and Nike (NYSE:NKE) are relevant.

While lululemon is thinking about what it wants to be, its rivals are still trying to catch up to what it is. Neither Nike nor Under Armour (NYSE:UA) seem to really be focused on lululemon, while VFC Corp (NYSE:VFC) (lucy brand), Gap (NYSE:GPS) (Athleta) and Limited (NYSE:LTD) (La Senza) are all making investments into stores and promotions to tap into that appealing $100+ yoga pants market.

The Bottom Line
The challenge for lululemon, as has been the case for a while, is managing expectations and dealing with a shareholder base that has been willing to pay very large premiums for the company's future growth. Controlled rollouts of new products reduce brand and inventory risk (lululemon seldom has to worry about sharply marking down undesirable merchandise), but most investors in lululemon don't own it because they're looking for a lower-risk opportunity; they want the growth.

Along similar lines, the Street didn't seem thrilled with management's guidance. Management's target for high single-digit comps seems conservative, particularly as initial signs from the Christmas shopping season have been pretty positive. Moreover, the company seems to be in no rush to push the accelerator on its expansion plans.

Right now, lululemon can be a great company so long as management sticks to its plan (and doesn't make an ill-advised move like an acquisition just for the sake of more growth). Unfortunately, I'm still not of the opinion that it's a great stock. Even if lululemon can more than quintuple revenue from 2011 to 2022 and post an unprecedented free cash flow margin for a retailer/apparel company, the stock is still well ahead of fair value. Considering the valuation and the tenor of today's shareholder base (at least the more vocal parts), I'd continue to admire Lululemon from afar.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.