After being inundated with Under Armor (UA) commercials during last years football season and into the baseball season, I was refreshed to find that there is an alternative to the high-performance sports apparel coming soon to a city near you! My poorly timed short in UA was unsuccessful and I was stopped out quickly. This time, I expect to fair much better with my recent purchase of Lululemon (LULU) which caters to the high end athlete looking for high performance stylish apparel for sports activities. The kicker with this company is that they have decided to concentrate almost exclusively on women athletes instead of the overcrowded male sector. While NKE and UA have begun to market female products to complement their male lines, LULU has 89% of their sales in womens apparel and has set an internal cap on mens revenues at 20%.

You may not have heard of LULU if you are a US consumer simply because they have not had a major presence in the US up to this point. This will change very quickly as the company has virtually saturated the Canadian market and now plans to spend most of its expansion energy in the US. The growth process usually begins with the company targeting a city capable of supporting 5-7 stores and setting up a pilot showroom in that city to better understand the community and gauge the demand for products. It will then roll out stores in the most affluent parts of that city in order to reach their target market best. Currently there are showrooms in Washington DC, Boston, Seattle and Denver with plans for new showrooms in Miami, Dallas, Houston and (woohoo) Atlanta.

The stock has only been listed on the US exchanges for a couple of months. It was offered at $18. in late July and closed and since the first couple of days of trading has stayed above $30 on a closing basis. When the first analyst reports came out, one of the biggest concerns was whether the company would be able to repeat its Canadian success in the US. Sales per square foot, one of the key metrics, showed a wide disparity with US stores lagging 20% behind Canadian counterparts. This was likely due to the lack of brand awareness in the US. Since the company does little in the way of mass marketing, it took some time for the company to get its message out through its preferred method of community involvement and word of mouth. The good news is that with the last quarters earnings release, that metric was up 79% in the US proving that the company is at least initially successful in duplicating its model that has worked so well in Canada.

LULU has been working hard to plan the expansion it is now executing. The infrastructure has been built to allow merchandise to flow to new stores, and suppliers appear to be in place to support additional demand for product. The development team appears to be very capable and in an industry that usually takes 12-18 months to get new products to market, LULU can usually take something from its drawing board to store shelves in 6 months. Stores typically cater to affluent customers and are comfortable environments with fresh flowers, filtered water, in-store alterations and a highly trained staff. Workers must spend 30 hours in training before hitting the floor to consult with customers. While products typically price above competitors comparable items, the better fit, pleasant customer support, and high quality have allowed the company to grow sales while enjoying very healthy margins. The company currently has two outlet stores in Canada and appears to be very efficient at marking down and moving excess inventory while maintaining premium prices for most of its merchandise.

The stock is not cheap by any means. Investors must subscribe to the assumption that the company will be significantly larger in just a few years in order to justify paying current prices. However, UA has proven how quickly a premium brand can catch on and grow when management executes well on its growth strategy. LULU appears to have everything lined up to succeed in that growth and should continue to push the upper end of analyst expectations providing positive surprises to investors. As long as the consumer stays healthy (and I think the rate cut bought us some time), I would expect LULU to be an outperformer.

LULU Notes

FD: Author has a long position in LULU

Additional reading:

Independent Equity Research profiles LULU and their foray into the US