Yoga retailer Lululemon (NASDAQ:LULU) continues to find ways to maintain its torrid growth rate. In fact, the company has been running out of product to sell.
In the latest quarter, revenue spiked 35.1% to $186.8 million. The key driver was the comparable-stores sales growth of 16%.
Net income rose to $33.4 million, or 46 cents a share, up from $19.6 million, or 27 cents a share, in the same period a year ago. It was yet another beat of Wall Street expectations.
And yes, Lululemon’s stock performance has been incredible. The return was 279.6% in 2009 and 127.3% in 2010. As for this year, the gain is 32.7%.
Can Lululemon keep up the momentum? Let’s take a look at the pros and cons:
Pros
Strong retail concept. Lululemon has 142 locations, with a focus in the U.S., Canada and Australia. No doubt, they are highly optimized for strong financial results. Over the past year, the average sales per-square-foot has gone to $1,800 from $1,428.
E-commerce. This is a huge source of growth. To get better results, the company has brought its e-commerce operations in-house. This should make it easier to provide a stronger branded experience, which resembles the company’s store environment.
The transition has not been cheap, but it should have a nice payoff.
Brand. Lululemon is turning into a cult brand. It has become associated with innovation and high-performance products.
Interestingly enough, the company uses a community-based marketing approach. This means using social media and local events. Lululemon has also been effective in forming partnerships with fitness practitioners.
While the brand is focused on women, the company is extending its line to men.
Cons
Inventory. This has certainly been a problem for Lululemon. While the company appears to be getting things under control, it will probably need to make new investments in its supply chain and infrastructure.
Economic environment. Based on recent reports, it looks like the U.S. is experiencing a slowdown. This is likely to have a dampening impact on retailers – especially those that have discretionary items.
Competition. Lululemon’s success is not going unnoticed. Top brands like Nike (NYSE:NKE), Adidas, Gap (NYSE:GPS) and Limited Brands (NYSE:LTD) are gearing up to get a chunk of the market.
Verdict
Lululemon has all the hallmarks of a sustainable growth company. Like a Starbucks (NASDAQ:SBUX), it has created an enduring brand that should allow for premium pricing power.
True, the valuation of Lululemon is at lofty levels, trading at 53 times the past 12 months’ earnings. Yet this is expected for a strong growth play.
While there are risks — such as from large competitors — Lululemon has the advantage of being focused on a large market opportunity. The pros outweigh the cons on the stock.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
