Berko: Is Lululemon good for the long haul?
Friday, September 06, 2013 7:00 AM
Dear Mr. Berko:
My married daughter in Florida has fallen in love with the Lululemon brand of fitness-related products. She told me that this year, she has spent more than $900 on designer fitness clothing for herself and my grandkids. And her neighbors and friends have probably spent an equal amount. Please tell me whether you think this stock would be a good buy for a long-term investment.
B.L., Oklahoma City
I never understood the personal need to spiff up like an effete male model when working up a sweat in the gym or jogging in the sunshine. Perhaps the Lululemon line of fitness stuff is for people who don’t perspire.
Lululemon Athletica Inc. (LULU-$70.19) was founded by Dennis Wilson, a serious Ayn Rand devotee who opened his first retail store in Vancouver, British Columbia, 15 years ago. LULU designs fitness pants, shorts, tops, jackets, underwear and other fitness-related products. The company manufactures most of its merchandise overseas, where global economic forces provide much more cost-effective venues. And LULU sells its athletic apparel through 137 locations in the U.S., 52 in Canada and 23 in Australia. However, I doubt that it will open more than a few token stores in Europe, where consumers’ tastes and expectations are not so naive as those of their American counterparts. Put a yoga top on a good-looking female model or running shorts on a handsome male model and advertise it in a magazine or on TV, and most Americans think they’ll look 25 pounds lighter wearing a LULU design. American advertising, especially TV commercials, promotes the utopian and silly idea that all our problems have a quick, simple, technological solution. And we’re as ready as sin to believe it.
LULU makes men’s hoodies – core hoodies, shift hoodies and dispatch hoodies – that retail for between $110 and $118. LULU also makes women’s hoodies – bliss break hoodies, voyage hoodies and scuba hoodies – retailing from $98 to $108. Now, I don’t know what’s special about a dispatch hoodie versus a shift hoodie or why a woman would purchase a voyage hoodie over a bliss break hoodie. But I do know that those hoodies cost LULU about $9.23, and that any American can buy a similar hoodie, probably made from identical material, for $21 at Costco, though it won’t have a LULU label. LULU sells 23 different pullovers for women, each with a different name; their costs range from $58 to $88, and they look great on their lovely models. But a pullover with the same design and the same material sold by Dillard’s at half the price for some reason doesn’t have the same slimming effect as a LULU brand. And of course, everyone gets a better workout wearing LULU merchandise! There’s nothing unique, exclusive or superior about a LULU product; however, LULU’s extraordinary advertising skills convince the consumer that the label makes her/him look sexy, cool, hip, 10 years younger and desirable to the opposite sex. But fat is as fat does!
LULU came public, with zero debt, at $25 in mid-2007, when revenues from 81 stores were $150 million and earnings were 23 cents a share. The stock split 2-for-1 in mid-2011, when revenues from 174 stores reached $1 billion and earnings rose to $1.26 a share. In 2014, LULU, still without debt, expects revenues from its 305 stores to exceed $2 billion and earnings to come in at $2.60 a share. I think LULU’s revenues and profits will continue to rise, and some analysts are thinking $3 billion in revenues by 2017. There’s also talk of another stock split soon. But I’m concerned that the shares trade at an extremely high 38 times earnings, and I’m concerned that Christine Day (former president of Starbucks Inc.’s Asia-Pacific group), who joined LULU in 2010, recently announced she’s leaving her post. She won’t give a reason. However, as long as Uncle Ben Bernanke continues to flood the economy with $85 billion each month, this stock could continue its rise and probably split again. But when that stimulus stops, you may find that a price-earnings ratio of 37-to-1 could fall to a 25 P/E.
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