Investopedia: How Far Can Lululemon Stretch?

By any reasonable standards, lululemon athletica (Nasdaq:LULU) has been a fantastic stock over the past two years. Not only has it tripled in value since its debut, but investors who loaded up on these shares in a big way in early 2009 are also looking at a 10-bagger or better. An investor only needs to hit a couple of those in a lifetime to do very well indeed.

But the big question is whether lululemon can maintain the momentum. Everything looks great for the company today, but grizzled retailing investors have seen stories like lululemon before and unfortunately, many of these stories do not have happy endings. (For background reading, see Analyzing Retail Stocks.)

A Solid End to the Fiscal Year  
For a company with a track record of blowing away estimates, lululemon's fiscal fourth quarter results were surprising only to a certain degree. Revenue jumped 53% and surpassed the top end of the analyst range, helped in large part by comp-store growth of 28%. Direct-to-customer sales growth was also strong (up 152%), but still constitutes a fairly low percentage of sales.

LULU once again coupled strong sales with impressive operating leverage. Gross margin jumped almost five full points, and the company's operating income grew 72%. LULU has exceptional operating margins for the retail sector - they're at 29% (up from just under 26% a year ago) - and the company once again delivered earnings per share well in excess of analyst expectations. (For more insight, see The Bottom Line On Margins.)

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