Lululemon: Large Cap In Waiting?

By Will Ashworth | January 13, 2012 AAA
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.)

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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.)

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

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