Is Lululemon’s Stock Still a Buy?

With shares of Lululemon (NASDAQ:LULU) trading at around $74.55, is it an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C – Catalyst for the Stock’s Movement

Lululemon has had a fantastic year by most metrics, and investors have handsomely rewarded the stock which is now up 54% YTD. The shorts have always enjoyed criticizing Lulu, yet have shown a general misunderstanding of the these core components: the company, the yoga and fitness market, and Lulu’s target demographic. But can this stock continue to be a darling of Wall Street?

Multiple indicators point toward strong continued growth potential for Lululemon. They manufacture highly regarded yoga apparel that targets a popular segment of the fitness industry and caters to a loyal customer base. This has allowed them to charge a premium for their products, and their customers have clearly decided that Lulu’s pricing is justified, even in a slow economy. Furthermore, they raised full-year EPS expectations on strong earnings in their last quarter.

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While these factors alone support the potential for continued growth, the real catalysts for future movement are in their plans for expansion, both into new geographic regions and into new fitness markets. Lululemon has just begun to tap into the international market, opening their first store in the European market in London earlier this year and recently opening a store in Hong Kong. Additionally, they have expanded their same-store product offerings in two ways. First, they introduced a men’s line of products (in Q1 of this year their men’s apparel contributed to 12% of sales). Second, they are expanding into other valuable fitness markets beyond yoga, with a growing collection of high-end running apparel items.

E – Debt to Equity Ratio is Zero

With no debt, $444 million cash on hand, and $726 million book value, Lulu passes this metric with flying colors.

T – Technicals on the Stock Chart are Strong

Lululemon has consistently outpaced the S&P 500…

Over the past month, the stock gained over 2.5% while the S&P 500 lost ~0.52%, and the numbers are even  more impressive when you look at a longer time frame. YTD Lulu has gained 54% compared to 14.96% for the S&P 500. For the calendar year, Lulu has gained 44.46% compared to 16.35% for the S&P 500. Looking at the 3-year return, the stock demonstrates a staggering growth of 981% compared to 36.02% for the S&P 500.

At its close of 71.78 on November 30th, Lululemon is trading essentially even with its 50-day SMA of $71.84. It is 6.8% above its 100-day SMA of 67.18 and 4.8% above its 200-day SMA of $68.52.

E – Earnings and Revenue Have Been Excellent

Earnings have been excellent over the last five years and show no sign of slowing down. Lululemon continues to demonstrate impressive YoY sales growth, with 33.1% growth in 2011 over 2010.

2007       2008       2009       2010       2011
Revenue ($)in millions

269.9

353.5

452.9

711.7

1,001

Diluted EPS ($)

0.23

0.27

0.41

0.85

1.27

 

And it’s hard to not like a company that has beaten earnings for the last five quarters.

     7/2011      10/2011      1/2012      4/2012      7/2012
Revenue ($)in millions

212.3

230.2

371.5

285.7

282.6

Diluted EPS ($)

.26

.27

.51

.32

.39

 

T – Trends Support the Industry

Yoga has proven itself to have serious staying power as a major component of the fitness industry, and Lululemon manufactures products that are highly regarded by yoga enthusiasts. To justify bets against this stock in the past, shorts have argued that yoga may fade in popularity, yet this has proven to be an expensive bet with little evidence behind it . On the contrary, evidence from both Lulu’s individual performance and that of yoga’s growing popularity as a whole points strongly to robust performance within their market segment. The high-end fitness apparel industry also taps into an ideal customer base, one that is very enthusiastic about a fitness-oriented lifestyle and has the money to spend to outfit themselves accordingly. As Lulu expands into new regions and introduces additional lines of fitness apparel to its loyal customer base, there are no signs of the market for their products slowing down.

Conclusion

It’s hard to argue against a company with impressive revenue growth, a loyal customer base, and a high net profit margin (net profit margin TTM is 18.5%) in a hot sector of the fitness industry . And if that doesn’t seem enticing enough, Lululemon’s expansion opportunities, both in terms of new fitness apparel lines and into new international (and domestic) markets points to further opportunities for continued excellent stock performance.  Based on these factors, Lululemon should OUTPERFORM in the long-run.

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