Lu Lu Lemmings

Lululemon (NASD: LULU), maker of sexy, butt-hugging yoga pants (and some other stuff too), trades in the realm of fantasy.  I say this because, at the current price and earnings, they're going to have to double earnings over the next say fiscal year (+/-) to bring the valuation even remotely in-line with other high-growth clothiers/retailers. 

Of course, they have to do this in a softening economy, with niche products which do not appeal (and more importantly don't FIT) the majority of people (especially) in America.  Oh, and their CEO is leaving and they just shuttered their stores in Japan.  I link to the Motley Fool article because I think its emblematic of the hysteria surrounding this particular company.  Take, the comparison versus far-larger retailers American Eagle Outfitters, Abercrombie & Fitch, Hot Topic, and Aeropostale.  Um, hello?  Apples to oranges anyone?

Lets compare to what I think may be the closest comp: Under Armour (NYSE: UA).  Both companies are roughly the same market cap, about $1.7bn for Under Armour and around $1.4bn for Lululemon.  Both are high-growth, speciality retail plays focusing on active/athletic markets.  Under Armour trades somewhere around 35x ttm earnings, while Lululemon, depending on who you ask, trades somewhere aroudn 75x.  I think its safe to say Under Armour has a far larger and deeper customer base than does Lululemon (think otherwise?  Please enlighten me in the comments below), and that their margins and revenues will hold up well in a recessionary environment as their products are not (on the whole) prohibitively priced.

Lululemon, on the other hand, is very focused on the niche "yoga-wear" market (and culture, blech).  Ok, so now everyone take a deep breath and lets think about this, k?  Lululemon makes very specific type of clothes for a very specific type of activity.  They aren't exactly cheap, they're very form fitting (in a country where most people are overweight, to say the least), and to rationalize the stock's current valuation, they have to essentially double earnings.  Did I mention how trendy their products/brand is?  No?  Ok, well it is.  Don't try to argue with me on this one, just trust me, Ok?

So, with all that being said, someone please explain to me how Lululemon is trading at 2x the valuation of arguably their closest comp. 

Disclosure:  Anal_yst, 1-2Knockout or its representatives may or may not be massively long or short the stock of companies discussed.  Analysis published on 1-2Knockout is not intended to be, and does not constitute any investment recommendation.  Consult your financial advisor before making any investments.

Comments

[TheUnrepentantGunner]

Anal_yst, you could've posted this much more succintly.

LULU is the CROX of 2008.

The end.

Good call though.

[1-2]

Damnit Gunner, you beat me to that! That'll teach me to wander away from the site--ever.

I think CROX is a much better comp to LULU than UA, but the analysis holds none the less. Long consumer disc, short CROX and LULU would be a pretty solid trade.

I hold no positions.

[Anal_yst]

Gunner, I couldn't have said it better myself (and, clearly, I didn't)

Touche sir, touche.

[Calgary Schmooze]

I can't wait to return to the Land Of The Fat during my trip to Texas and Louisiana at the end of the month.

I have heard that the American LULU stores toss in a free shoehorn and can of axle grease with every purchase to help customers get into the clothing...

[Nominate me]

I would like a little love for comparing LULU to CROX yesterday on DB. I think the term used was dog shit. But I'll double check.

Schmooze, Texas also has a solid amount of hot ass.

Excellent job on the blog so far.

Question, is there really some knucklehead forcing you to include a disclosure on your posts?

[Calgary Schmooze]

With a population that is roughly 70% of that of the entire country of Canada, I sure as hell hope there is some hot ass in that state!

Every time I go shopping at The Galleria, I try to count the number of hot chicks, but, unfortunately, the tally is usually disappointingly low.

[Anal_yst]

@ Nominate me

Please forgive me for not giving credit, I haven't been getting as much DB as usual, been busy over here unfortunately.

As far as the disclosures, we are the only knuckleheads here, and figured that a little CYA couldn't hurt, especially since if you actually read the wording, they aren't exactly standard legalese...

[TheUnrepentantGunner]

And yes i didnt read your post either Nominate... I guess great minds...

[Nominate me]

I use a hot chick indicator when evaluating retail. If a disproportionate number of fat chicks are wearing a certain item (i.e. crox), it's not a good investment.

@ Schmooze: the Galleria is run over with tourists. Why don't you go to Times Square and base your opinion on the people there while you are at it. Be a mini-baller, get the bottle service at the Hotel Zaza bar in Dallas...profit.

You might run into the trader that sits across from me this weekend.

[OPM Finance]

The only thing bad about comparing LULU and CROX is that most short sellers of the latter were carried out horizontally. That thing had huge short interest for many moons and just went straight up. The excessive valuation did pay for some nice Ferraris in Boulder, though.

[Antonina]

ahahaha Did you even checked out the earnings for lululemon this year? I bet your big fat ass you didn't. Snap!

[Anal_yst]

Thank you Antonina for that very useful comment. Lets evaluate:

1. I work out 4-6 days a week. My ass is not fat, although my weekend consumption patterns, if continued, will ensure that it is before the close of FY '08.

2. Earnings? What are they? Do they grow on trees? I bet in your world (yahoo message boards) they do.

3. Lululemon's results are helped by having a smaller float and a lower tax rate this year. The results are stellar, but by no means rationalize the stock's valuation.

Watch next 2 quarters as their same-store sales growth slows dramatically. I'd love to be a permabull like you, but reality is that (as I hoped you all learned from the past year) asset prices do not go up indefinitely.

[Calgary Schmooze]

Slows dramatically? They are pulling out of Japan entirely. Must that must be due to changes in the carry trade, eh?

They also announced they are hiring additional senior executives to help expand into swimming, running and dancing. I was unaware of the highly lucrative swimming and dancing markets but do have an understanding that when you poke the Nike monster in the wrong manner, you risk getting slapped around.

[Anal_yst]

Yes, Schmooze, I honestly can't imagine this multiple lasting more than another quarter or two. If I were more ambitious, I'd put some research together on average time to normalized multiple reversion, but again, thats a big "if".

Also, excuse my trusting of Reuters data, as it seems Lulu's current market cap is actually GREATER than Under Armour at around $2.1Bn.

CHE RIDICULOUSO!