Viewing Yoga Pants Like a Gadget, and Lululemon’s Business Model vs. Apple’s
Could there be an Apple (AAPL) of yoga pants, a company whose products inspire such Apple-like esteem and loyalty that competitors are forever relegated to lower-end snippets of the market? And if there is, should investors buy it, at any price?
Such is the dilemma now for any investor looking at Lululemon (LULU), a company that’s been wildly successful selling expensive yoga pants and the like for about five years. Investors from its 2007 IPO have near-10-fold gains, and the shares are up some 260% in the past two years alone, as seen in the below stock chart. But as big-name competitors like Nike (NKE), Nordstrom (JWN) and Gap (GPS) line up for a direct assault, Lululemon is really going to need Apple-like dominance to keep this up.
Lululemon’s success so far comes from completely dominating the high-end workout clothes market. It’s a segment they pretty much created with a pair of yoga pants nice enough to wear to dinner and a reputation for making anyone’s butt look good. Sales of those pants combined with a line of equally versatile tops, hoodies, jackets and accessories totaled $1.17 billion in the latest 12 months, up from about $370 million three years ago.
Perhaps more importantly for investors, Lululemon’s profits grew faster. That’s such a welcome anomaly among aggressive growth stocks these days – think all those social media companies with little or no profits – that Lululemon management has many fans in the market. YCharts Pro gives it strong marks for fundamentals.
Recently though, retailers with lots of cash have gone all-in to compete with Lululemon’s products. Gap is opening Athleta stores and targeting the same crowd. Nordstrom has a similar line. Nike and Under Armour (UA), which already keep potential customers away from Lululemon on the running side of the business, are doing everything they can to steal away Lulu’s yoga fans. The vast majority of these products are priced just enough cheaper than Lululemon to look like bargains but maintain high-end status.
Lululemon is alarmed enough by the knock-off threat to sue several companies for patent infringement -- how Apple-like. (PVH Corp's Calvin Klein, and manufacturer G-III Apparel Group Ltd). But if the competition is hurting Lululemon’s bottom line, it’s hard to see yet. The company upped its forecasts earlier this month. Sales at comparable stores next quarter are expected to mark gains from the low to mid-teens; diluted earnings per share are expected to rise some 33%. It was this recent earnings report that upped valuations on Lululemon shares back into the stratosphere just as investors began questioning whether yoga pants could really be worth so much.
Continuing high valuations -- the Lululemon PE ratio hovers around 50 -- led a couple of enthusiastic buyers of the stock to back off to hold ratings this year, noting that competition, as well as general economic weakness in the U.S., could slow growth. (It’s a Canadian company with stores only in North America, Australia and New Zealand.) Unlike its competitors, Lululemon’s future is much more reliant on one, possibly faddish, sport. Many followers do have faith in the company’s ability to adapt early to trends, and slightly less than half the analysts that follow it still have buy recommendations on the shares.
The problem for Lululemon investors is simply the expectation – years on end of very high growth – its share price suggests. At these levels, management could do everything right and still see the shares hit by selling when there are problems beyond its control, like when investors get worried about the market or the economy generally. That is, unless it really is the Apple of its world.