Lululemon's a Real Lulu: Under the Radar
NEW YORK (
) -- If you are looking to invest in store growth,
Lululemon Athletica
(LULU) - Get Report
is not the stock for you.
But a retailer doesn't need to be a store whore to rank among the best in class, especially in this economy.
Indeed, the yoga-inspired apparel retailer has done the seemingly impossible: as shoppers across the board trade down on discretionary purchases, Lulu has convinced them they need a pair of $90 pants that they will use solely for sweating. How do they do this? Sell them the promise of a better life along with sports bras and workout mats.
Granted, the company's good have much to recommend them: Loyal Lulu shoppers are hooked on the technical "moisture wicking" fabrics, with fancy names like Luxtreme and Silverescent, that vow to keep their wearers both sweat-free and odor-free. And they're fond of the flattering fits that make them feel as though they have lost weight before even hitting the gym -- and can be worn from spin class to the grocery store. Then there's Lululemon's five-year guarantee on all of its products.
But gym buffs can find workout gear with technical fabrics practically anywhere these days, especially at traditional sportswear companies like
Nike
(NKE) - Get Report
and
Under Armour
(UA) - Get Report
.
What keeps "Luluheads," as loyal shoppers are more fondly known, returning to the stores is the aspirational lifestyle the retailer sells along with its gear.
Lululemon embraces its motto of self-improvement, offering free yoga classes and giving customers a forum to express their personal, health and professional goals.
"We never approach customers with the intent to sell, but to educate," CEO Christine Day said in an interview. "We ask them their goals and encourage them to share their dreams, both health and professional."
In keeping with this personalized approach, the company doesn't rely on traditional television and magazine advertizing. Instead it builds relationships with the communities it operates in, forming close ties with yoga studios and gyms and pairing with some of the most sought-after yoga instructors.
This entire package of good karma has helped the company not only remain afloat, but successful during the economic downturn.
In its second quarter, which ended Aug. 2,
Lululemon reported a 17% drop in its second-quarter profit
to $9.2 million, or 13 cents a share, compared with $11.1 million, or 16 cents a share, in the year-ago period. Analysts expected the company to earn 10 cents a share.
But sales actually managed to jump 14% to $97.7 million, even as same-store sales fell 2%.
Day attributed the comparable sales decline to an uptick in traffic amid leaner inventories, a problem most retailers would kill to have right now.
And while management responded quickly, delivering an incremental 800,000 merchandise units in an attempt to meet demand, it wasn't enough to turn comps positive.
This bodes well for the second half of the year, as the company adjusts inventory levels to meet demand heading into the holiday season and as system upgrades allow Lulu to replace items within 14 to 45 days.
Looking ahead, Lululemon expects third-quarter profits in the range of 11 cents to 13 cents a share.
But how can the company continue at this break-neck pace without losing its cache?
Lululemon currently only has 115 stores in the United States and Canada, and up until this point has been a growth story. But management plans on rolling out only nine new locations this year, significantly less than the 35 new stores Lulu opened last year.
And while, on paper, the expansion prospects for the company are substantial, growing at a rapid rate may not gel with the company's image of exclusivity.
In fact, Lululemon even took a $4.5 million charge in the fourth quarter to break leases, Stifel Nicolaus analyst Richard Jaffe said.
"We will not grow faster than our human capital," Day says. "We want each store manager to be experts and serve as the mayor of fitness in their community. The store count isn't what motivates us."
Day likens Lululemon to
Urban Outfitters
(URBN) - Get Report
, another retailer that
. Both insist that premium retail concepts should not exceed 300 to 400 stores in order to maintain exclusivity.
Day, who took the reins at Lululemon in 2008 knows first-hand the threat of growing too large too quickly after her 20 years in various roles at
Starbucks
(SBUX) - Get Report
.
"Coming from Starbucks has taught me how to develop and grow around a culture and not focus on unit growth at the expense of doing each unit really well," she said. "You always have to deliver experience. Unit growth will always be there, but once you break the trust with your customer you can't get it back. If you grow too large you are no longer a part of the local community."
Thus, the company is looking to new concepts and international expansion to fuel growth.
Earlier this month, management announced a new tween concept called ivivva, which targets the 12-year-old girl. "We noticed younger girls shopping at our Lululemon stores and we want to retain the sophistication of the brand. We don't want Lululemon on younger women because we believe it's bad for the franchise," Day said.
To this point, Day insists ivivva won't be a mini-Lululemon, like
Gap's
(GPS) - Get Report
Gap Kids. The company plans to test three of these stand-alone stores in Canada before the holiday season.
Meanwhile, as Lululemon has slowed down its store openings, its stock has been on something of a growth spurt, running up by more than 75% in the past two months.
Shares of the company closed on Monday at $23.50, and have been trading between $4.33 and $27.99 in the 52-week period. The stock is up 30.5% from its $18 IPO price back in 2007.
The company ended the quarter with $83.8 million in cash and cash equivalents.
And while Jaffe says Lulu's good news is already reflected in the stock price, trading at about 30 times his 2010 earnings per share estimate, other analysts believe it still has some room to grow.
Odlum Brown analyst Barbara Gray wrote in a note: "We continue to recommend investors to establish a position on this local high-quality, debt-free, fast growing athletic apparel company.... We believe the stock still has strong long-term upside potential."
Sounds like a stock you can take to the bank -- and wear to the bank, too.
-- Reported by Jeanine Poggi in New York
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