Analyst-Cursed: Lululemon Athletica inc. (LULU) Is Still Cheap – The Gap Inc. (GPS), Under Armour Inc (UA)

Remember, e-commerce sales result in high margins because of lower costs of sales. Christine Day has informed prior to the fourth quarter results that the company’s “gross margins are running slightly ahead of plan.” You wouldn’t be wrong to expect higher e-commerce sales to be the reason. I believe lululemon’s direct-selling segment has a very strong growth potential, and will further contribute to the compaany’s overall growth. In short, saying that lululemon’s high growth days are over is ridiculously unreasonable.

Of its competitors, Under Armour Inc (NYSE:UA) and The Gap Inc. (NYSE:GPS) are two of the closest. However, Under Armour’s focus on men’s wear and Gap’s greater size make the comparison inconsistent. Yet, generally speaking, lululemon seems like a much better investment.

Under Armour saw some very tough quarters up until 2012 during which period lululemon proved its mettle. Last year, however, was a turnaround story for Under Armour Inc (NYSE:UA) which made a massive comeback, opening new stores, beating earnings/revenues in all four quarters and touching its all time new highs. Yet, when compared to same-size lululemon, its return on equity is half that of lululemon and also has lower free cash flows. lululemon boasts higher gross margins by over 500 basis points and double the net margins than that of Under Armour Inc (NYSE:UA).

Likewise, lululemon’s better utilization of assets (more than double Gap’s return on assets) and its lack of long term debt make it more attractive against The Gap Inc. (NYSE:GPS) which offers a cheaper lulu-like athetic wear at Gap Athleta and also formally advertises using celebrity endorsements, unlike Lululemon Athletica inc. (NASDAQ:LULU). Yet, The Gap Inc. (NYSE:GPS) missed revenues in the latest quarter. Analysts are now also conservative about Gap’s ability to keep up its margins. Contrast this with LULU’s margins discussed above.

Lululemon’s strength, in addition to its superior quality and despite formal advertisement, is the loyalty of its customers to the ‘ohm’ symbol. The recent sell-off frenzy was definitely unwarranted. Another beat is coming in Q4. It’s time to load your portfolios!

The article Analyst-Cursed: This Retailer Is Still Cheap originally appeared on Fool.com and is written by Palwasha Saaim.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.