Lululemon, Hot or Not – What’s the Story?

In the retail sector, things have gotten tough. Macy's, Wal-Mart, Target, and JC Penney have all confirmed that the environment is extremely competitive.

And your knee-jerk reaction to the latest results from specialty retailer Lululemon may be skepticism. After all the maker of yoga apparel said it expected sales growth at established stores to slow sharply in the current quarter.

Also, gross profit margin fell to 55.4 percent of revenue from 55.8 percent last year, and operating margin slipped to 25.5 percent from 25.9 percent.

But dig down and Cramer said you'll come to realize results were nothing short of astounding.


Here's why:

1. Future growth remains gigantic. They only have about 200 stores in the U.S., and Lulu will also start testing the market in up to 15 countries over the next two years.

2. The men's business is coming on strong even if it is only 12% of total revenues.

3. The international ramp is just beginning and it could be much bigger than the United States.

4. Lululemon feels like it's more than a fad. When the maker of yoga apparel opened in Columbus Ohio a cornucopia of yoga studios also opened.

5. The apparel appeals to the wealthy - they don'tusually have to take mark-downs.

Cramer said the real issue with putting money to work in Lulu is the stock's multiple – which is around 40 times near year's growth rate..

"The rich premium is largely fueled by mutual fund managers who are always looking for the highest growth name," Cramer explained. "They seem to have decided it might be inexpensive on a multiple basis in the out-years -call them 2014-2015."

"Eventually that game ends," Cramer warned. "And it could happen rapidly as it did for Whole Foods when the law of large numbers made it impossible to keep blowing numbers away.

Considering the stock has about 14% short interest, Cramer said it's clear there are investors betting on the game ending.

"However, so far negative bets have been unrequited because this company, even at $10 billion, has more going for it in a secular fashion that almost anyone else."

In the near-term it looks as if Canaccord Genuity analyst Camilo Lyon is looking for more upside; he recently placed a "buy" rating on Lululemon with a $91 price target.

"We believe LULU is evolving from an athletic brand with its roots in yoga to a lifestyle brand that is marrying form and function," Lyon said in a published report.

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