Lululemon Athletica Inc. (NASDAQ: LULU) is a retailer of athletic apparel that experienced explosive growth in the years following its August 2007 initial public offering (IPO). Since that time, LULU has appreciated 450%, while the Standard & Poor's 500 Index gained 41% and the S&P Retail Select Industry Index gained 109%. Rapid operational expansion, followed by a slowdown and an emerging turnaround back to gains, were all clearly reflected in the LULU price chart. Benchmark correlations were relatively low.

Price History

LULU shares hit a prerecession peak above $27.60 in October 2007 on a split-adjusted basis. The company was especially hard hit in the market crash, falling more than 90% to $2.25 in March 2009. Three years of exceptional growth followed, as LULU rose nearly 2,700%, hitting $77.70 in May 2012. Significant volatility followed in the coming years, but the stock had resistance around $80 and support at around $60. This support was broken in late 2013, and shares dipped below $38 in 2014, but Lululemon was poised to bounce back shortly thereafter. The stock recovered again late in 2014, and it bounced between $60 and $65 throughout most of 2015. LULU fell back to $50 in late 2015 before climbing steadily in the first half of 2016. As of July 2016, the stock has returned 450% from its August 2007 IPO.

Operating History

Lululemon was a high-growth company over the 10-year period leading up to July 2016. The average revenue growth rate during this time was 37.7%. The slowest rate of expansion was 13% registered in the fiscal year that ended in January 2015, and this is still a relatively strong figure. While sales continued to grow quickly, there was a clear deceleration as the company achieved higher scale and market saturation. The revenue growth rate declined four straight years from 57% in fiscal 2011 to 13% in 2015.

Lululemon's 10-year average net income growth rate was 69.1%, and the only year with contraction was fiscal 2015, when earnings dropped 14.5%. The company's gross margin hit a decade-long peak at 56.9% in fiscal 2012, but margins fell steadily from that point to 48.4% in fiscal 2016. Operating margin also peaked in fiscal 2012 at 28.7%, similarly falling steadily until fiscal 2016 at 17.9%. Strong revenue growth offset some of these margin trends until fiscal 2014, when profits peaked at $280 million.

The meteoric rise of LULU from 2009 to 2012 coincided with excellent financial results. Over this period, revenue expanded 41.5% annually, and gross margin improved more than 6 percentage points. Gains from scale allowed operating leverage to compound rising gross margin, sending operating margin nearly 13 percentage points higher. Growth stocks with strong fundamentals generate especially high optimism in bull markets, so speculation and aggressive valuation further bolstered LULU share prices. Consumer preference shifted to favor Lululemon's yoga-inspired offering, and growing brand strength helped install competitive stability.

This run of outperformance was not completely sustainable. Saturated markets and increasing competition caused growth rates to slow and margins to compress. Earnings per share (EPS) in the fiscal years 2015 and 2016 fell short of the 2014 figure. Doubts over uniqueness and price competitiveness clouded the story, and such threats to a long-term narrative can have severe effects on speculative growth stocks. This fueled volatility in 2013 and a sharp drop in 2014, a time in which the wider market continued to grow. Concerns over product quality and management quality compounded those woes. The years 2015 and 2016 saw some improvements, with same-store sales figures turning around, revenue growth inching up and margin expansion expectations rising. Under these conditions, LULU shares once again approached all-time highs.

Correlation

LULU shares bear some correlation to the benchmark indexes, but the impact of market forces has been limited. Since the IPO, the correlation coefficient between LULU and the S&P 500 was 0.515. The coefficient with the SPDR S&P Retail ETF (XRT) was also low at 0.576. These figures are even smaller for the trailing one-year period as of July 2016. Financial performance, outlook and appetite for risk have clearly been more significant price drivers.

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