Lemon Lulu

Benj Gallander and Ben Stadelmann
Monday, Wednesday May 6, 2015

Canada may be a nation that will always be associated with offering investors the opportunity to buy solid companies in commodities and financials, but we’ve had some pretty varied, successful firms in other sectors get their start here too.

The list includes iconic names like Blackberry, Cirque du Soleil, IMAX, Nortel, Roots, Tim Hortons, and Lululemon (LULU-Q). Yes, it’s true that some of the aforementioned have resulted in tumultuous investing experiences, but the nature of this game we play doesn’t provide guarantees, just varying probabilities of success or failure. LULU is fascinating to watch as it is constantly newsworthy, leading to lots of variability in the stock price.

It doesn’t always seem apparent to those outside of Canada that Lululemon Athletica Inc. was founded and remains headquartered in Vancouver. The company gave up its TSX listing almost two years ago and moved to the NASDAQ. So much for home-court advantage.

LULU has certainly had its share of tumults with the most famous being in March of 2013, when they pulled almost 20 percent of their signature women’s black yoga pants off the shelves for being too sheer. Then, in the quarter that followed, they took a $17.5 million inventory provision, which hit the bottom line and led to other markdowns and a drop in sales. Oh, and their CEO of five years, Christine Day, decided to leave. The time to sell the stock was then because it had lost half of its value one year later.

Meanwhile, founder Chip Wilson was feuding with the board and talking about a buyout via a proxy battle. There was also growing noise about how Nike and Under Armour, who focus on male customers and athletic apparel, were moving into Lulu’s space and upping the level of competition. Ultimately, this was a propitious time to buy because it proved to be much ado about nothing – just a lot of posturing and hyperbole. So now that Lululemon’s shares have risen by around 80 percent, what of the future?

Yogasmoga has been operating for two years now and was started by a former Goldman Sachs trader named Rishi Bali, who says his firm can be Lululemon 2.0.

“There’s no killing Lululemon,” Mr. Bali said. “But people want an alternative, and I think there’s room for three or four solid players. We just want to be that next guy in the space.”

If Mr. Bali is correct, can LULU withstand the competition?

Even with all of the recent travails, revenues grew from about $453 million in 2010 to almost $1.8 billion last year. The next stage of expansion in their sights is Asia and Europe, where fashionistas might have appreciated the revealing nature of the clothing that was denigrated here. But seriously, those two continents do offer compelling possibilities for growth, if the rollout can be managed effectively.

Even during the difficult times, Lululemon managed to be profitable on an annual basis. That bodes well. However, investors should note that during the recession, this was a stock that flirted with a $5 trading price. Currently, it is around $65. That indicates a more muted upside, and, with the notoriously fickle nature of retail customers, staying in the limelight is not guaranteed when competitors would like to eat your shorts.

Time for full disclosure: while we do not own any shares, Benj has been wearing Lulu’s shorts and longs to yoga classes for years. While it might not help his flexibility, they do make him feel mighty sleek.