This Is an Appealing Apparel Stock

09/12/2011 8:30 am EST

Focus: STOCKS

Patrick McKeough

Editor, Successful Investor

This Vancouver-based designer and seller of yoga-inspired athletic wear and accessories has become the epitome of yoga wear, and is quickly becoming a big hit in the US and other markets, writes Pat McKeough of the TSI Network.

Dennis “Chip” Wilson founded Lululemon Athletica (LULU) in 1998, after noticing that more women were taking up yoga and other physical activities. Wilson had 20 years of experience making surfing and snowboard clothing. He believed that the all-cotton fabrics then used for yoga were inappropriate.

When Wilson opened the first Lululemon store in the Kitsilano Beach area of Vancouver in 2000, he positioned its staff not just as salespeople, but as “lifestyle” educators. Wilson invited yoga, Pilates, fitness, and dance instructors to join Lululemon’s “R&D team,” and give feedback on its apparel, in return for a 15% discount. He also recruited some of them to appear on Lululemon’s posters, Web site, and postcards.

Lululemon has also developed its own stretch fabrics, such as Luon, its signature fabric, and Silverescent, which uses silver yarn that has anti-bacterial qualities (which Lululemon calls “anti-stink”). As well, all of Lululemon’s athletic wear has premium features, such as flat seams, which reduce chafing.

Lululemon is one of those Canadian stocks that has expanded abroad successfully. It has 45 stores in Canada, 85 in the US and 12 in Australia. The company plans to open 25 more stores within the next year.

Most of the company’s stores operate under the Lululemon athletica banner. However, three of its outlets sell dance-related apparel for girls under the Ivivva athletica banner. The company recently launched a new e-commerce site, www.ivivva.com, to sell Ivivva merchandise.

In the three months ended May 1, Lululemon’s revenue rose 35.1% to $186.8 million, from $138.3 million a year earlier (all figures in US dollars). Same-store sales rose 16%. Earnings jumped 70.4% to $33.4 million, or 23 cents a share.

The company holds cash of $260.9 million, or $2.41 a share. It has no long-term debt.

Lululemon operates in a competitive and fickle market. However, the company has built a high-quality and popular brand that attracts a wide range of loyal and higher-income customers.

Over the longer term, the company’s growth could stall if the economic recovery slows. That could result in a drop in its share price. Lululemon also faces rising costs for its products from its manufacturers.

But in the near term, its new stores should continue to push its sales and earnings higher. Lululemon is a buy for aggressive investors.

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