Lululemon (Nasdaq: LULU) is up another 18% today, as of the time of this writing, after reporting a much better than expected quarter (36 cents EPS on 25 cents analyst consensus).
This tells you what I know about fashion – I wrote about their previous blow-out quarter, warning that:
They will need to continue achieving rapid growth in order to grow into the existing valuation. If not, you will see a significant haircut in the stock price
… and …
Lululemon is a classic case of a well-run company that you do not want to own stock in.
This was back at $40/share (or a 2.8 billion market capitalization). Today, I see $66/share or a $4.6 billion dollar company!
Where did I go wrong? Don’t underestimate social trends when it comes to fashion – most importantly, I should have taken the subtle hints when I see family relatives wearing Lulu material. From my neanderthal male perspective, I remember walking into a Lulu store outlet with my wife, and while she went looking for some overpriced pants, I was looking around the store, asking myself how the heck they deserve a $2.8 billion dollar valuation when it is so clear that they will be prone to predatory competition.
Financial lesson of the day: Never underestimate the value of brand.
I have never had a position in LULU stock, and plan to keep it that way. I will disclose I did consider buying shares at $5 in the middle of the 2009 economic crisis, but decided on going with long term corporate debt of another fashion star, Victoria’s Secret (Limited Brands) instead, so I’m not kicking myself too hard about the matter.
Even though I don’t understand the fashion world, from an investment perspective I have always found it to be utterly fascinating because of the intense amount of “social research” required in order to properly value these companies.
Yeah, I have to admit LULU had me a little baffled, in terms of how strongly they’ve held up. About the only money I’ve made off them was buying their shares short-term after they had that seaweed kerfuffle and making a small profit.
Regarding the difficulty of determining fashion whims, my informal test was noting the number of bags from a particular store that I’d see around. It wasn’t a conscious thing, but when I kept seeing LaSenza bags (and their subsidiary brands’ bags) all through 2002-2004, the idea of buying the shares definitely started to take hold. One of my better investments in the end.
LaSenza is now under Limited Brands, but I do remember them being on the TSX at some point.
I keep an unhealthy watch on a lot of fashion companies, but the one that always “gets” me is Coach. I remember the first time walking into the store and asking myself “how the heck do these guys make money, who in their right mind would buy these products?” and then I looked at their financials… oh my.