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Competition, Portfolio Value And Investment Risk

|Includes: Lululemon Athletica Inc. (LULU)

In a recent excursion to my local Starbuck's, I surprisingly discovered that a major drugstore chain had moved in over the weekend, installing its equipment at the former location of a privately-owned pharmacy. Those in the know say that the 80-year old "mom and pop" business was urged to sell or see its national competitor move in across the street. The message was pretty clear. Sell or lose revenue to a well-capitalized opponent.

Competition is nothing new. Some experts consider healthy competition to be the lifeblood of a capitalist system. Consumers almost always benefit from lower costs, expanded inventory and/or better service. Yes, some rue the day when large chain stores muscle out local vendors. Remember the Shop Around the Corner children's bookstore that was pushed into oblivion by Fox Books as portrayed in You've Got Mail? Protests to preserve the charm of Meg Ryan's operation gave way to the appeal of being able to choose from a large selection of books while sipping a cappuccino from the cafe of Tom Hank's mega-store.

However, what is good for some may not be so for others. Shareholders of a company that faces more competition may see the value of its interests decline, depending on the ability (and associated costs) of a firm to respond. If the company operates as part of a mature industry, maintaining (or improving) profit margin and market share has its challenges.

As a trained appraiser and someone who serves as a financial expert on matters that involve questions about valuation, investment performance, risk-taking and suitability, I am surprised whenever I discover that the issue of competitors has not been duly vetted. Investors need to carefully monitor the competitive landscape on an ongoing basis, whether to partake in an Initial Public Offering, approve an exit via acquisition or merger or rebalance their holdings.

The folly of ignoring the threat of competition (or at least giving it short shrift) is the topic of a March 21 article about Lululemon. According to Business Insider's Ashley Lutz in "The Walls Are Closing In On Lululemon," intense competition is giving this retailer a headache and arguably worsening the economic impact of a recall of 17 percent of its black luon yoga pants for being too sheer. Nike, Under Armour and the Gap are some of the firms that offer "very similar products in response to Lululemon's popularity." In another Business Insider piece, Athleta, Calvin Klein, Old Navy, Gaiam, Victoria's Secret and Nordstrom are other cited firms that want to monetize the buying habits of the downward dog crowd. See "15 Hot Brands Vying To Be The Next Lululemon." This increase in competitive pressure comes as no surprise to me. As a devotee of yoga, I can understand why someone would go elsewhere to buy pants at $30 a pop versus $100, especially if you are likely to frequently replace workout clothes because of wear and tear. That said, Lululemon (ticker symbol is LULU) has enough high ticket buyers to have grown from its 1998 start in Vancouver as a health-focused "community hub" to nearly 200 stores worldwide with a market capitalization of over $9.33 billion (according to Yahoo! Finance).

Whether Lululemon can bounce back quickly is a hot discussion item this week. According to "Lululemon Expects More Write-Offs on Pants" by Wall Street Journal reporter Andrew Dowell (March 21, 2013), the true costs of the recall remains to be seen. One reader offers that the increased publicity could work in the company's favor to generate more visibility and therefore more sales. During a March 21 earnings call, Lululemon's CEO Christine Day described strong fundamentals, excellent results in 2012 and a commitment to "earn the loyalty of our customers and shareholders every day going forward." She comments that 2013 results will likely reflect "lost revenue in the range of $57 million to $67 million" plus additional costs related to the write-down of the yoga pants in question. See "lululemon athletica inc. announces fourth quarter and full year fiscal 2012 results."

According to the NASDAQ website, 337 institutional holders own 96.34 percent of Lululemon shares. These include Capital World Investors, Lone Pine Capital, Fidelity, JP Morgan, Ameriprise, UBS and Vanguard.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.