Strong Debut Predicted for Lululemon

Associated Press, All Associated Press News

NEW YORK (AP) - As investors continued to reject MF Global's initial public offering on Friday, analysts are predicting success for next week's debut of a very different company: Canadian yoga and fitness clothing retailer Lululemon Athletica Inc.

Lululemon is a vertical retailer that operates through 59 retail stores in Canada and the U.S. The company principally targets its branded yoga and fitness apparel to a niche clientele of female athletes.

Lululemon expects its offering, which totals 18.2 million shares, to price between $10 and $12 per share. The company plans to sell 2.3 million of the shares offered in the IPO. A group of stockholders will offer the remaining 15.9 million shares.

Analysts agree that the signs point to a strong debut. "I think investors are going to give this deal a premium," said Sam Snyder, an analyst with Renaissance Capital.

In fact, analysts are comparing Lululemon's potential success to that of Under Armour Inc., an athletic clothing maker that has rewarded investors since its IPO in November 2005. After its IPO priced at $13 per share, Under Armour shares nearly doubled in their first day of trading, closing at $25.30. On Thursday, Under Armour shares closed at $57.38, more than quadruple the initial offering price.

Analysts note that Lululemon has been able to control and strengthen its brand through a vertical retail strategy. Francis Gaskins, president of research company IPODesktop.com, said Lululemon's brand strength and customer loyalty are reflected in the company's same-store sales, which surged 25 percent in 2006.

Same-store sales, or sales at stores open at least a year, is a key measure of retailer performance, because it measures growth at existing stores rather than from newly opened ones.

Analysts are also encouraged by the company's growth opportunities. Lululemon plans to open a total of 20 to 25 new stores in fiscal year 2007 and 30 to 35 stores in fiscal year 2008, both in the U.S. and Canada. The company already launched nine stores in the first five months of fiscal year 2007 and opened 14 stores in fiscal year 2006.

Lululemon also plans to open stores in Japan and Australia through joint ventures and eventually pursue joint venture opportunities in other Asian and European markets.

Although Lululemon targets a niche clientele of female athletes, specifically yoga enthusiasts, the company intends to broaden its product range to appeal to male athletes as well. The company also expects to expand its product offerings for other athletic activities and in categories including bags, undergarments, outerwear and sandals.

According to Gaskins, Lululemon's "pattern of success" supports its aggressive growth strategy. For the first quarter of 2007, Lululemon's earnings increased 11 percent to $3.5 million, from 3.2 million in the prior year. Revenues surged 59 percent to $44.8 million from $28.2 million in the first quarter of 2006.

In 2006, Lululemon's stores opened at least one year averaged sales of about $1,400 per square foot, which Snyder noted is well above the industry average.

Analysts also like that Lululemon plans to fund the store openings with cash from its operations, in addition to the IPO proceeds. The company has budgeted a total of $28 million to $34 million for new store openings in fiscal 2007 and fiscal 2008.

The IPO isn't without risk. Snyder noted that the company is small and the athletic apparel space is subject to intense competition.

David Menlow, president of IPO Financial Network, said some investors may also be scratching their heads over a sudden reversal of a shareholder, Highland Capital Partners. Highland first planned to offer 1.8 million shares in the IPO. The shareholder then dropped out of the deal on July 13, only to reverse course again on Tuesday. In Lululemon's latest filing, Highland's shares are included in the deal.

Despite the reversal, analysts say signs are positive for Lululemon. "Overall, the company is sending out a message the insiders really believe in they what they helped develop," Menlow said.

Goldman Sachs, Merrill Lynch, Credit Suisse Securities, UBS Securities, William Blair, CIBC World Markets, Wachovia Capital Markets and Thomas Weisel Partners are listed as underwriters for the offering.

The underwriters have been given the option to buy up to 2.7 million additional shares from the selling stockholders to cover any overallotments.

The company, which is concurrently offering its common stock in Canada, expects to list its shares on the Nasdaq Stock Market under the symbol "LULU" and on the Toronto Stock Exchange under the symbol "LLL."