High-flier Lululemon (NASDAQ:LULU) looks like it’s a vulnerable target for a U.S. recession. After all, the company operates a chain of fancy retail locations that sell premium yoga and athletic apparel. Isn’t this the kind of thing that is easy to put off? Do you really need $98 groove pants?
Despite all this, Lululemon’s management still is fairly upbeat on the growth prospects — even in the short term. Keep in mind that, in the latest quarter, the company posted a sizzling 39% increase in revenues to $212.3 million. In fact, comparable-store sales spiked by 20%.
So how can Lululemon keep up the growth momentum? First of all, the company is getting aggressive with its Internet strategy. For example, it recently launched ivivva.com, which is a highly interactive online store. So far, the site is only for Canadian customers, but a version for those in the U.S. will go up in late fall. To spice things up, the company has even partnered with Walt Disney Co. (NYSE:DIS) to create apparel for the comedy series Shake It Up!
Next, Lululemon is boosting its plans for Australia. Instead of launching two stores for 2011, the goal now is to have seven. No doubt, the country is experiencing lots of growth, largely because of its healthy trade with China.
This all sounds good, right? It certainly is. But there still are some big headwinds. Despite its efforts, Lululemon continues to have issues with its inventory management. The company also is trying to deal with commodities inflation and even air-freight costs.
At the same time, the competition is heating up. Operators like Gap (NYSE:GPS), Nike (NYSE:NKE) and Nordstrom (NYSE:JWN) are gunning for the market. Of course, these firms know how to capitalize on a new trend. True, it will take some time to make a dint — but the competition is likely to put pressure on Lululemon’s growth rate and margins.
But for investors, the biggest issue really is the valuation. Even though the stock has experienced a recent slide, the valuation still is at a hefty 58 times earnings. And with the slowing economy and rising competition, it probably will to be tough to keep demanding growth investors happy.
Tom Taulli is the author of “All About Short Selling” and “All About Commodities.” You can also find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.