This Demographic Creates Bulletproof Stocks

Lululemon has been run through the wringer lately, but it and others aiming at the same target market will be just fine

By James Brumley, InvestorPlace Feature Writer

Lululemon (LULU) has been anything but an easy stock to own for the past year-and-a-half. Three times since April 2012, Lululemon stock has toyed with the $80 level, and all three times the market has found a reason to pull the rug out from underneath the stock.

Errantly see-through yoga pants was the prod for one of the pullbacks, but most of the plunges we’ve seen from shares since late 2011 were simply the result of earnings warnings. A funny thing happened on the way on the road to disaster, though — when it came time to post earnings, Lululemon not only topped estimates in each of its past 14 quarters, but it cranked up year-over-year earnings in 12 of them. By an average of 53%.

That pace of growth can’t last forever, simply because the mathematical comparisons become more and more challenging as the bottom line gets bigger. Yet, given the current economic environment where some consumer-driven companies are struggling to show any growth at all, Lululemon’s strong trailing and projected growth begs one big question:

How the @#$% is a yoga-wear company, of all things, putting up those kinds of numbers?

There’s actually a very good answer … and better still for interested investors, there’s more than one company managing to crank up its top and bottom lines at a time when it shouldn’t be so easy to do.

The Proof Is in the Premium

What do Williams-Sonoma (WSM), Starbucks (SBUX), Michael Kors (KORS) and Lululemon have in common?

The knee-jerk response might be that all four are retail/consumer-oriented names, which is technically true. But, it’s not the only correct response.

One also could argue that these four corporations — though they’re hardly the only ones this could be said of — draw a freely spending crowd based on the strength and perception of their name brand rather than the value of their product. It’s not “luxury” spending, mind you; it’s difficult to categorize coffee or yoga pants as luxury goods. It would be more accurate call it “trend” spending.

But what a powerful trend it is, if the final commonality is any clue.

While it’s true that these four companies are (1) consumer-oriented and (2) purveyors of overpriced goods, it’s also worth noting how all four of these organizations have also cranked up their bottom lines by an annualized average of 29% over the past couple of years. Lululemon led the charge, but even laggards Starbucks and Williams-Sonoma saw earnings growth at least in the high teens during that time. For comparison, the S&P 500’s earnings growth rate has averaged less than 8% for the last couple of years.

Point being, giving customers what they want rather than what they need is still an amazingly profitable business model. What these four companies have done, however, is tailor-make their proverbial shtick to speak to the modern, tablet-toting, credit-card-carrying, consequence-free customer.

Quality Over Quantity

Contrary to popular belief, there are more than a few so-called millennials — and a few younger Gen-Xers — that aren’t broke and/or swimming in debt. They’re not all necessarily flush with cash, and they’re not spending on things the baby boomers and older Gen-Yers could easily justify buying. But enough of them have enough access to enough money (or credit) to keep the cash registers ringing, and that mentality might never change.

Remember, the current batch of 18- to 35-year-old consumers is the first generation to be brought up seeing everyone get a trophy just for playing a sport. The younger portion of this generation was taught in an educational system that didn’t correct an incorrect answer as long as that student’s reasoning was solid. This is the generation of workers that forced bosses and managers to overhaul the employment paradigm, from one where the company dictates the terms of the work relationship to one where the employee calls the shots.

Given the prevailing mind-set, it’s not hard to understand why these consumers feel they deserve to own a $130 nonstick egg poacher from Williams-Sonoma.

It’s not just an incurable sense of entitlement that’s keeping the biggest-spending consumer group flocking to names like Lululemon and Michael Kors, however. This is a demographic with a surprising number of well-funded members. It’s not the strongest set of earners; that honor still belongs to 55-year-olds, give or take. But, the top 20% of the 25- to 35-year-old group (10 million of the group’s 50 million constituents) earned more than an average of $50,000 in 2012; the top 10% earned more than $80,000 last year.

While it might not seem like much to older consumers, to younger consumers who’ve been taught little about money but taught a great deal about rewarding themselves first, $80,000 might as well be a million bucks. The strength of the economy or the market is irrelevant to most of them.

The bottom line is, Lululemon, Starbucks and a handful of other may seem like they’re running on borrowed time. But really, they could milk their target market and keep their profits growing for years to come.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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