"Children are the orgasm of life," declares Lululemon Athletica's manifesto. The meaning of that proverb doesn't exactly spring to mind with yogic vim but other nuggets contained in the retailer's mission statement make a lot more sense.
In fact, this little sheet is an unintentionally useful guide to the analysis of this amazingly successful retailer and the investment merits thereof. Let's examine Lululemon using some of its manifesto's more prominent catchphrases.
"Life is full of setbacks." Too true, says the seasoned and scarred growth investor. But buying Lululemon stock at seven bucks 20 months ago was not a setback - it was the opposite of a setback, whatever that is. The company has blown past expectations, to the delight of investors. Even analysts who were sure they spied trouble have been humbled: swelling inventories had them convinced the company was having a hard time selling stretchy pants but it turned out inventories weren't high enough for the huge increase in demand.
But the consequence of that success is a stock now priced for perfection at 46 times estimated earnings for the next year. Lululemon is conducting excellent business and it has lots of growth ahead. But the path is fraught with risk - delays, shocks and other potential setbacks - that, while they might be minor in the greater scheme of things, will crush this stock because it has such a high multiple. History is pretty clear on investment returns from high PE stocks: they're downward dogs even if the company does well.
"Listen, listen, listen and then ask strategic questions." Excellent advice. Listen to the company's growth story: revenues in the latest quarter up 56 per cent year over year. Earnings per share up 80 per cent. Same-store sales up 29 per cent. More-profitable online sales beating everyone's expectations. Profit margins are fat and perhaps getting fatter as the company introduces brilliant new clothes such as those with silver woven into the fabric to kill bacteria so yummy mummies can go to hot yoga and then straight to the mall without showering. And there's also the prospect of opening more stores. There are more per capita in Canada than in the United States, suggesting room for a lot more south of the border.
Sample strategic question: Lululemon is riding the coattails of a big fad called yoga. The retailer gives instructors free clothes in a brilliant marketing ploy and its customers now wear Lululemon even when they're not exercising. Yoga shows no sign of slowing now, but all fads eventually do. What's the company doing to avoid being the baby in the bathwater when this eventually happens?
Sample strategic question No. 2: What if the market for high-end expensive sports/day wear is smaller than thought (isn't it always?)
"Sweat once a day." One reason to sweat: CEO Christine Day used to work at Starbucks. That firm was once like Luluemon: it could do no wrong. But then the unexpected started to happen. For example, despite making excellent coffee, it suffered when a backlash saw consumers starting to prefer independents for a variety of reasons. It also suffered quality malfunctions when it grew too fast. If you bought Starbucks five years ago when it was changing hands for a high multiple, you've made nothing.
"Breathe deeply." That's right, breathe deeply - and think twice before buying this stock. Wait until it pulls back. If it doesn't, and it goes up, don't feel bad. History is on your side and you'd have taken a big risk to earn that return had you invested.
And finally, if you ignore this advice and it turns out to be right, always remember one final piece of advice from the manifesto: "Friends are more important than money."