Lululemon (NASDAQ:LULU) and Under Armour (NYSE:UA) are the perfect examples of trendy growth stocks. Both companies sell products that garner strong customer loyalty and admiration. The stocks have the same effect on investors as well. But in the past few months, there has been serious doubts about both companies. So which one will give investors the growth they desire at a discount?
Results of Q3
Under Armour boasted a 24% increase in revenues and a 23% increase in EPS. This continues its 10 quarter streak of over 20% growth. Its apparel segment also grew at a clip of 22%. This is good news for Under Armour considering apparel is its most important business segment. This proves that there is still strong demand for Under Armour products, especially through partners like Dicks Sporting Goods.
However, Under Armour admitted it was still trying to figure out the "cadence" in athletic footwear. Management pointed to the footwear segment as a driving force to the difficulty it is having in keeping margins growing consistently. Under Armour also saw an increase in its marketing costs in order to try and expand their footwear and women's segments.
Lululemon had a fantastic Q3 with year to date net revenues rising 37.5%. Gross profit was $175.3 million which was a 36.4% increase over Q3 2011. Lululemon has 201 stores which account for 79.6% of its revenue. This all came with a comparable stores sales increase of 18% and an increase of 89% for their direct-to-consumer sales. In fact, Lululemon's direct-to-consumer sales continue to make up more and more of its total revenue, growing from 10.4% in Q3 2011 to 14.3% in Q3 2012.
Both companies gave investors some bad news for the rest of 2012. Under Armour expects to see a reduction of 40 basis points to its gross margins. This is due to the supply chain challenges the company faces. These challenges stem mostly from its airfreight problems and material costs. I believe that Under Armour is still a solid growth company but is starting to see some bumps in the road. This includes trying to manage its supply chain and growing its footwear segments. Under Armour is still a good growth story fundamentally. But if margins continue to decrease Under Armour may see its investors jump ship.
Lululemon also gave very cautious guidance as well. It forecast a decrease of $5million in sales in Q4, saying they expect a "soft start" to next quarter. On the positive side, Lululemon does plan to open 10 new stores in Q4. Lululemon also pointed out the opportunity to grow its men's segment. In Q3 Men's made up 12% of its business.
Which One is on Sale?
Lululemon is currently selling at 40 times 2013 earnings. This is compared to the 34 times 2013 earnings Under Armour is selling at. But the PE ratios do not tell the whole story. Both companies are slated for solid growth in 2013. Under Armour's expected EPS growth in 2013 is 26%. Lululemon's growth, however, is slated to be an astounding 44% in 2013. This gives Lululemon a PEG ratio of only .91 compared to Under Armour's 1.30 PEG ratio. This would make Lululemon the clear winner.
Why is Lululemon a buy at these levels? I believe Lululemon has a lot of room for growth. Its cautious reduction in guidance also seems to be a trend of under promising and over delivering. Bill Maurer points out this pattern in his piece here.
While Lululemon is seeing competition start to rise, it is still the trend setting store for its genre of sports apparel. Under Armour faces too many headwinds from its supply chain and from large competitors such as Nike to be able to deliver the same level of growth Lululemon can. Lululemon also has serious room for growth in the future. The opening of their retail stores are events and bring excitement to its stores. Under Armour is too heavily reliant on sporting goods retailers and behind on the growth of its factory stores. Lululemon also has opportunities to grow its men's wear as well. Also, Lululemon's win in its intellectual property suit against Calvein Klein shows how unique its products are in the market place.
In the store that is Wall Street, Lululemon is on sale. With room to grow and a solid following, Lululemon could be the steal investors need in 2013.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.