Stephanie Link: Can Outcast LULU Be the Darling Again?

NEW YORK (TheStreet) -- It's been a pretty volatile last 12 months for sports apparel maker, Lululemon (LULU). After being the darling on Wall Street for many years with double digit growth, superior execution and exciting sports apparel products, the company stumbled in 2013 and shares have fallen 34% from its highs.

I might be a bit early on this one, but I like it here. First off, I like the category growth potential as lifestyle and health trends continue to explode higher, which are positive secular tailwinds for the stock and the industry. The industry size is enormous for global sportswear, standing at $250 billion, growing at high single digit rates. In the U.S. the market is expanding at double the rate of traditional apparel at $80 billion in sales. Just about every woman I know wears one of these brands for comfort, style and performance. In North America, there are really just 4 big time players - Nike (NKE), Under Armor (UA), Gap's (GPS) Athleta and LULU. Internationally, Adidas is also a formidable competitor with a $23 billion market cap.

We own and like Nike in Action Alerts Plus, Jim Cramer's Charitable Trust, because of its industry dominance with superior returns, a strong balance sheet and Direct-to-Consumer growth opportunities. It also is in the process of turning around its China operations and, in doing so, is positioned for positive operating leverage in 2014. And at 23x forward earnings estimates, the valuation is reasonable.

I also admire Under Armor from afar with its strong products and market share gains, though trading at 60x forward estimates, it's a bit rich for me. The Gap owns Athleta - my personal favorite, but I don't really want the other parts of the company given the run up in its shares. LULU is down and out and my recommendation is based on my belief that the many problems it had in 2013 will get fixed under new management which will lead to a higher stock price. With sentiment so low, not much has to go right in my view. It has a small share of the market - at $1.5 billion in sales ($1 billion in the U.S.) and room for growth internationally (under 10% of total sales), new product categories (swim, daywear, running), and menswear. The square footage growth also is a plus with the company expected to reach 350 total US stores in the next two to three years, up from the current 166-store base. Finally, Direct-to-Consumer (DTC) and e-commerce initiatives will further drive growth.

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