Monday, January 30, 2012
Does my butt look fat in this?
I thought this was crass - but for the life of me I can't think of any better explanation for the stock price.
lululemon athletica it is a remarkable company. The website describes the product (in lower case) as "yoga clothes and running gear for sweaty workouts" and it sells its products in the three fattest nations in the world (USA, Australia and Canada). You would think a specialist yoga and running clothes retailer in those markets would be playing to a limited audience.
But if you thought that you would be wrong.
lulu had sales of $629 million for the nine months ended October 30. This was up about 35 percent from last year. This is a retailer so the fourth quarter matters. Last year they did 245 million in sales in that quarter and this year (at a guess) it will be 35 percent higher - say 331 million. Annual sales will be somewhat shy of a billion dollars.
A billion dollars in sales is a lot of "yoga clothes and running gear for sweaty workouts". Nike by contrast does just over 20 billion in sales but shoes are a much bigger category - and their market is seemingly much wider. After all Nike also makes shoes for yoga and running (and my guess is the shoes should command more gross dollars of margin than the leotards).
Scale and stock price
A billion dollars in sales is huge for such a narrow category. But even that is small compared to lulu's stock price. You see lulu market cap is now almost $10 billion. The stock is priced at 10 times sales. That is amazing for a fashion company. Nike by comparison has a market cap of $46 billion and a price to sales ratio of just over 2. And Nike is not a thin margin business. No other clothing company comes close.
Here is a chart of Apple's price to sales ratio:
Apple spent most the time at about 1 to 3 times sales (currently just over 3) and never exceeded 7 times sales.
Apple was never as richly valued as lulu lemon athletica.
So I want to play the valuation guessing game.
* What is the value of the end market for yoga and running clothes. Is it $5 billion per year at which point lulu will be priced like Nike or is it larger or smaller?
* Can you explain the stock price in any terms other than a play on female vanity? Is Kid Dynamite's explanation of the brand appeal and the stock right?
* Even as a play on female vanity is it overpriced?
* What if anything keeps the competition out of yoga clothes?
I would really like to know what any of the big institutional holders are thinking. Maybe their butt looks fantastic but their brain looks a little suspect.
I have no position. Shorting female vanity is not something I have ever done successfully - and I sure as hell would not want to be long this. Besides the entire "it is overpriced" argument applied 50 percent down from here.
The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.