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August 21, 2011

A LULU of a Bubble

Message Boards are Wonderful

At least, some of them. I posted a short list of stocks to follow which included lululemon athletica inc. (LULU) and I got the following reply from Fool "gibbersome":
I would suggest kicking out LULU. GAP's market cap is 8.64B, while LULU's is 5.78B. Retail companies are steady earners, but like GPS, LULU cannot remain a growth story for very long, especially since it is a niche product (other companies sell similar stuff).

The high margins LULU has been able to enjoy so far had to do with its products being new. It was a fad that has either reached its peak or passed it. I'm not saying that LULU won't rebound, only that the other stocks on your short list will outperform it.
This comment kicked off a desire to look at comparative Market CAPs to see just how LULU stacks up. Of the 75 retailers on my tracking list, LULU comes in 18th. LULU's has a P/E ratio of 50, the highest after Charles & Colvard Ltd. (CTHR) which is an irrelevant company for our purposes. (Note: WMT's Market CAP on the chart has been divided by 2.5. In reality it is $182 billion)

Retailers sorted by Market CAP - descending

Eyeballing the chart, it would seem that "better" retailers receive a median P/E ratio of 15 (excluding the outliers) while lower quality retailers receive only around 8 to 10 (excluding the outliers). The dividing line seems to be around a Market CAP of $430 million. Not very scientific, I know. wink

Sorted by P/E Ratio, this is what the chart looks like: (Note: Again, WMT's Market CAP is not to scale)

Retailers sorted by P/E Ratio - descending

LULU is the most "expensive" after CTHR. If WMT can sport a P/E ratio of 11.42 with its huge Market CAP, I think it is fair to say that LULU has a floor of 15 to 20.

Bubbles Are Us

The objection gibbersome has is that LULU is a fad and can't continue to grow forever. Valid comments, both. My experience with retail tells me that unless some untoward event happens, apparel stores saturate the market when they reach about 800 stores not counting international. As of May 1, 2011, LULU had 81 stores in the USA out of a total of 138 stores including Canada and Australia. My rule of thumb says they can grow revenues ten fold or more if they extend their product lines.

Simple arithmetic, decreasing P/E ratio from 50 to 15 and increasing revenues ten fold would give a Market CAP of $17.7 billion. Is that reasonable? I dislike the comparison to The Gap (GPS) because it is a chain well past its prime with well over 3,250 stores world wide. Once growth is gone, the P/E ratio drops, in the case of GAP to 8.55. A better comparison might be to Coach, Inc. (COH) with a Market CAP of $13.4 billion and a P/E ratio of 15.74.

The Tipping Point

Malcolm Gladwell has written a very interesting book about fads or social epidemics. In it he talks about the resurgence of Hush Puppies and more importantly the rise and fall of Airwalk, the skateboarding shoes. If you visit skatewarehouse.com men's shoes you won't find any Airwalks!

Lululemon's yoga clothes certainly are a fad and, if properly managed, can continue to grow and attract an ever widening audience, as long as management does not screw up. Having read management's discussion of the business in the 10-K, it looks like they are on track to continue fueling the fad. But it bears careful watching.

The Bottom Line

While in investing there are no money back guarantees, my analysis tells me that LULU has multi-bagger potential. Only time will tell if it develops or not.

Denny Schlesinger

Form 10-K lululemon athletica inc. January 30, 2011
The Tipping Point: How Little Things Can Make a Big Difference by Malcolm Gladwell
skatewarehouse.com men's shoes You won't find any Airwalks wink

Data the charts are based on. Source Yahoo!, August 21, 2011.
Symbol  Name                              Market      P/E
WMT     Wal-Mart Stores, Inc. Common St  181,590    11.42
TGT     Target Corporation Common Stock   34,400    12.19
COST    Costco Wholesale Corporation      32,560    23.23
WAG     Walgreen Co. Common Stock         31,190    13.56
PCLN    priceline.com Incorporated        22,340    31.83
TJX     TJX Companies, Inc. (The) Commo   20,490    16.61
COH     Coach, Inc. Common Stock          13,380    15.74
BBBY    Bed Bath & Beyond Inc.            12,390    15.44
VFC     V.F. Corporation Common Stock     11,430    18.27
DG      Dollar General Corporation Comm   10,960    17.06
SPLS    Staples, Inc.                      9,660    11.00
BBY     Best Buy Co., Inc. Common Stock    9,000     7.76
CMG     Chipotle Mexican Grill, Inc. Co    8,760    46.17
GPS     Gap, Inc. (The) Common Stock       8,640     8.55
ROST    Ross Stores, Inc.                  8,190    14.16
HANS    Hansen Natural Corporation         7,040    29.11
FDO     Family Dollar Stores, Inc. Comm    5,840    16.22
LULU    lululemon athletica inc.           5,780    48.99
ANF     Abercrombie & Fitch Company Com    4,940    27.29
URBN    Urban Outfitters, Inc.             4,090    17.01
TSCO    Tractor Supply Company             3,820    21.05
DKS     Dick's Sporting Goods Inc Commo    3,650    19.28
PNRA    Panera Bread Company               3,060    24.25
GME     Gamestop Corporation Common Sto    3,050     7.87
WSM     Williams-Sonoma, Inc. Common St    3,020    14.85
DECK    Deckers Outdoor Corporation        2,820    20.17
GES     Guess?, Inc. Common Stock          2,810    10.00
UA      Under Armour, Inc. Class A Comm    2,720    35.93
BIG     Big Lots, Inc. Common Stock        2,260    10.55
CHS     Chico's FAS, Inc. Common Stock     2,150    17.47
AEO     American Eagle Outfitters, Inc.    2,140    13.85
CROX    Crocs, Inc.                        2,090    19.70
DSW     DSW Inc. Common Stock              1,680    14.64
BKE     Buckle, Inc. (The) Common Stock    1,620    11.79
CRI     Carter's, Inc. Common Stock        1,610    12.62
PSMT    PriceSmart, Inc.                   1,560    25.43
CAKE    The Cheesecake Factory Incorpor    1,460    17.39
CAB     Cabela's Inc Class A Common Sto    1,420    11.53
SHOO    Steven Madden, Ltd.                1,330    16.16
BC      Brunswick Corporation Common St    1,220     N/A
NDN     99 Cents Only Stores Common Sto    1,170    15.64
BJRI    BJ's Restaurants, Inc.             1,120    41.53
BWLD    Buffalo Wild Wings, Inc.           1,040    23.48
GCO     Genesco Inc. Common Stock          1,000    16.88
ARO     Aeropostale Inc Common Stock         865     4.76
TRLG    True Religion Apparel, Inc.          687    14.48
PEET    Peet's Coffee & Tea, Inc.            677    33.97
RUE     rue21, inc.                          617    18.60
ZUMZ    Zumiez Inc.                          534    19.18
RRGB    Red Robin Gourmet Burgers, Inc.      441    41.62
GIII    G-III Apparel Group, LTD.            427     7.45
HGG     HHGregg, Inc. Common Stock           401     9.48
BH      Biglari Holdings Inc.                393    13.47
LL      Lumber Liquidators Holdings, In      393    18.87
LIZ     Liz Claiborne, Inc. Common Stoc      384     N/A
HOTT    Hot Topic, Inc.                      335     N/A
CBOU    Caribou Coffee Company, Inc.         274     7.95
BODY    Body Central Corp.                   268    20.48
OWW     Orbitz Worldwide, Inc. Common S      222     N/A
PETS    PetMed Express, Inc.                 214    12.08
NWY     New York & Company, Inc. New Yo      201     N/A
DEST    Destination Maternity Corporati      182     7.30
KIRK    Kirkland's, Inc.                     176     7.95
CONN    Conn's, Inc.                         168     N/A
CTRN    Citi Trends, Inc.                    157     7.64
TUES    Tuesday Morning Corp.                147    12.19
ZLC     Zale Corporation Common Stock        117     N/A
NATH    Nathan's Famous, Inc.                 94    46.74
APP     American Apparel Inc Common Sto       92     N/A
CWTR    Coldwater Creek, Inc.                 86     N/A
DAVE    Famous Dave's of America, Inc.        76    14.42
CACH    Cache, Inc.                           67     N/A
ARKR    Ark Restaurants Corp.                 51    23.04
CTHR    Charles & Colvard Ltd                 44    76.00
JOEZ    Joe's Jeans Inc.                      43    22.67

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