Chip Wilson, the founder of Lululemon Athletica (LULU, $61), had been in the snowboard, skate, and surf business for twenty years when he took his first yoga class. According to the company's Website, the post-yoga feeling reminded him of the exhilaration he felt from riding the waves and the slopes, and Wilson subsequently directed his energies towards designing performance athletic fabrics. He started LULU in 1998 and opened the first store in Vancouver in 2000. As of May, 2011, the company had 142 store locations in the United States, Canada, and Australia. Over the last three years the stock is up over 1,000%.
A common question raised by skeptics is, Who would pay $100 for a pair of yoga pants in this economy? To understand the company's success we really have to break that question down into two parts. As for the high price tag, that's the same question people asked about the $5.00 Lattes at Starbucks. American consumers have a way of confounding the skeptics, because we don't seem to mind paying up for quality and fashion when there is a product we really desire. I have noticed that women, especially, are often attired as if they were on their way to or from a workout even when they are just grocery shopping or driving carpool (it may be true of men also, but I tend to notice women, especially the ones who have been sticking to their fitness regimen, like my wife). The yoga pants and other accoutrements are not only highly functional, they are also stylish, and that means people are sporting them as every day causal wear. A price tag of $100 doesn't seem so outlandish when it's a piece of clothing that you can wear at places other than yoga class or the fitness center. As for the second part of the question, in this economy, we need only remember our "Tale of Two Cities" reality. Not everyone is buying those yoga pants (and it's pretty obvious that not everyone is working out, either), but the people who do are fiercely loyal. And there is no contradiction at all in putting on those high-dollar pants for a bargain-hunting trip to the Dollar Tree or T.J. Maxx. So maybe that is what is meant by those "Co-exist" bumper stickers: a thriving Costco and Dollar Tree in the same economy as the prospering Coach and Lululemon.
There are no freezers, microwave ovens, or can openers at Chipolte Mexican Grill (CMG, $354) restaurants. Because Mexican food tastes so yummy, I have never thought of burritos and tacos as being particularly healthy. CMG, however, has created a new niche in the restaurant sector by emphasizing Mexican fare that is made with fresh ingredients. CMG is really a south-of-the-border version of Panera Bread (PNRA, $146) in terms of its place in the restaurant market--fast, quality food that is reasonably priced and offered in a casual setting. Both CMG and PNRA stand to benefit from consumers who are "trading up" as well as those who are "trading down." My wife and I eat at Panera a few times a month, but it's been years since we darkened the door of a Red Lobster or Olive Garden, two restaurant chains owned by Darden Restaurants (DRI, $44). Shares of DRI are down about 3% over the last year (Warning: Bear Trap). While we are happy saving a few bucks by dining on the quality food at Panera instead of our favorite gourmet spot, I would certainly find myself sleeping on the couch if I told my wife I was taking her out to Red Lobster. Success is at the high-end and low-end, with the middle shrinking. And speaking of co-existing in the Tale of Two Cities, my favorite restaurant stock is Yum! Brands (YUM, $61), the owner of Taco Bell, Pizza Hut, and Kentucky Fried Chicken. (You don't have to eat it to invest in it.) Like McDonald's, YUM is executing successfully with their international expansion. So, pass the tacos, pizza, and chicken wings, and we'll see how much stretch is in those yoga pants.
If The Three Bears had slept on Tempur-Pedic mattresses, then Goldilocks probably wouldn't have cared whose bed she picked for her post-porridge nap. My wife and I are in the market for a new mattress, and we recently paid a visit to the Relax the Back store here in Memphis. I could spend an entire day in there, because they have just about everything imaginable to make you feel comfortable and relaxed (except the drugs). I like both the mattresses and Tempur-Pedic (TPX, $59) stock. When we looked at the potential for a recovery in the housing market, I suggested that one way to play this is to invest in companies that will likely benefit from a robust housing recovery, but are doing just fine with the status quo. TPX would fall into that category, along with the previously-mentioned Stanley Black and Decker (SWK, $71). Once again, not everyone is going to be forking over $2,000+ for a new mattress, but people who can afford to upgrade their sleeping experience are probably going to be checking out the Tempur-Pedic, maybe taking one for a "test nap." TPX stock is up about 600% over the past three years.
I am not recommending that you buy any of these stocks, but they do illustrate some of the truths about high-growth companies. All three of these fall into the category of what I call "enhanced lifestyle experience"--staying fit, eating healthier, and sleeping better. Their results in sales and earnings indicate that a lot of people like what they have to offer, and the market has rewarded them for their success. LULU trades at a price/earnings multiple of about 53, CMG at about 54 times earnings, and TPX at a less-lofty 20 times. Those multiples seem high, but not really outrageous if the companies can continue to deliver the growth that the market expects. However, should any of these companies fail to meet--actually, if they fail to exceed--the market's expectations, their stock prices will fall drastically, enough to scare the yoga pants right off of you. Just take a look at shares of Netflix (NFLX, $94) if you need a reminder of how brutal the market can be to a stock. As a general rule, however, most investors need some exposure to high-growth stocks, but we should limit that exposure to a certain percentage of our portfolios, depending on our overall financial picture and risk tolerance. Remember: no risk, no return; no guts, no glory.
I also have a very unscientific bit of analysis that I like to apply to stocks in the retail and restaurant sectors, and I call it the "Memphis test." I love my hometown, but this great city is not exactly ground zero for the latest trends in fashion and dining. By the time some "new thing" really catches on in Memphis, that can be a red flag that the concept may be running out of steam--reaching a saturation point for future growth, in other words. LULU has one location here, above the Ben and Jerry's behind Houston's Restaurant near Poplar and Mendenhall. It is open only Thursday through Saturday. My wife knew about LULU because she owns a retail clothing store, and I found out about the company solely through my investment research. (I know, I am not a good example, since I am not exactly sitting here every morning with my Yogini, practicing our asanas and watching CNBC.) As anecdotal as this may be, LULU passes the Memphis test with flying colors, although the company does a lot of business online, and that is making the test less relevant. CMG has only one location here, so I'll say they pass the Memphis test as well. TPX has been around longer, so the test really doesn't apply to them.
Even if you don't invest in these companies, you can still enjoy their quality offerings. So, let's get dressed up for yoga class and grab some guacamole. Then, as Sonny said in The Godfather, "we go to the mattresses."
Life is short. Get busy.
Jim
Disclosure: My immediate family members and/or I own shares in LULU, TPX, SWK, and YUM.
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