Lululemon (Nasdaq:LULU), the champion of activewear fashion, struck again January 10, announcing that it expected higher-than-anticipated earnings per share for its upcoming fourth quarter and year end January 29. The inventory problems it suffered earlier in the year appear to have fixed themselves. Only about $1.3 billion or 15% growth in its share price stands between it and large cap status. Deserving or not, everyone seems to have an opinion. Read on and I'll analyze who thinks what and why. By the end of the article you should be down right confused. (For related reading, see Market Capitalization Defined.)

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

CEO of the Year

The Globe and Mail named Lululemon's Christine Day its 2011 CEO of the year. In an article appearing in its Report on Business Magazine November 24, two things stood out for me:

1) Its stock is up over 280% since Day joined the company. Actually, it's up around 215% as of January 11, but who's counting. If a company's stock price is the gauge by which investors rate the CEO's performance, then Day rates very highly indeed.

2) The company continues to use scarcity of product to seduce its loyal following. Lululemon proves that sometimes you don't have to give the customers what they want, to be successful. There's a fine line between keeping the brand evangelists eager and wanting more to disappointing them and sending them elsewhere, but so far Day and company have been able to pull it off. Certainly there's no comparison in Canadian retail. (To learn more, read The 4 R's Of Investing In Retail.)

Brand Loyalty

Motley Fool's Evan Niu believes Lululemon's brand loyalty is stronger than Nike (NYSE:NKE) or Under Armour (NYSE:UA). Christine Day took over as CEO on July 1, 2008. The third quarter of 2008 was her first full quarter as CEO and revenues were around $87 million. In the third quarter of 2011, revenues were approximately $230 million. In three years, its revenues have grown about 164% on a cumulative basis. Under Armour's third quarter in 2008 (September quarter-end opposed to October for Lululemon) saw revenues of almost $232 million, exactly the same as Lululemon's today. Fast forward to this year and Under Armour's third quarter revenues were about $466 million, delivering 101% cumulative growth. If revenue growth is how one values brand loyalty, Lululemon's got it over Under Armour by a decent margin.

Conviction List

In the ultimate kiss of death, Goldman Sachs (NYSE:GS) added Lululemon to its list of highly recommended stocks January 4. The banking and securities firm believes revenue growth will continue to drive Lululemon's stock higher, suggesting its price could hit $64 within the next six months. Considering its stock's up about $10, currently sitting at about $61, there's not much doubt the call by analyst Michelle Tan will hit that target. The question is whether the stock can muster enough steam to grow about another $4 beyond that to hit $10 billion in market capitalization. It seems much of Tan's enthusiasm for Lululemon beyond its sales growth is her belief that Day, the former Starbucks (Nasdaq:SBUX) executive, has solved its inventory problem once and for all. Tan calls Lululemon "one of the most compelling stories in retail." I'd probably have to agree. (For additional reading, see Analyzing Retail Stocks.)

The Bottom Line

I've written so many articles about Lululemon that I've lost track. In all the time I've been writing about stocks, I don't think I've ever seen a company that polarizes investors like LULU. In some ways, it's the company's own fault. They are the masters of spin. One minute they've got an inventory problem and the next moment things are better then they've ever been. Ask them about sales per square feet and in some periods (Q3 2011 - $1,880) they'll gladly tell you, but at other times (Q3 2010 through Q2 2011) they fall silent. Whatever happens as Lululemon moves towards large-cap status in 2012, it won't be dull, that's for sure. (For related reading, see Valuing Large-Cap Stocks.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  6. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  7. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  8. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  9. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  10. Investing News

    Alphabet Earnings Beat Expectations (GOOGL, AAPL)

    Alphabet's earnings crush analysts' expectations; now bigger than Apple?
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center