By now, most everyone is aware of the devastating effect that Amazon has had on many in the retail store industry.  As Amazon continues to capture retail business, brick and mortar stores continue to lose out.  All of the iconic names in retail have been marginalized by Amazon’s low cost and convenience model.  Sears is struggling to remain a viable entity, JC Penney, K-Mart, Macy’s are showing quarter over quarter losses, Neiman Marcus is up for sale and even Nordstrom is suffering.

A big part of the sales decline at these stores are rooted in the lack of appetite for major clothing brands.  The chart below shows the stock performance of some well known brands compared with the trajectory of the overall market indices.

With the exception of PLCE in the apparel sector, we observe that apparel stocks have been middling at best with most unable to generate positive returns over the past year.  Ralph Lauren, RL continues to look precarious even as the stock slide has been evident for the past 6 plus months.  Even our Dow stock, NKE which we have been favorable towards,  has not been immune to waning market demand for their wares.

These brands are all mainstream clothing labels and their ill health is reflected in the poor performance of the larger retail store industry.  To be sure, certain specialty retailers have managed to do well, including the aforementioned PLCE.  Another such specialty retailer is Lululemon, LULU.  The fortunes of the company paralleled the ascent of the yoga craze that swept the world over the last decade, because apparently there is no yoga without flashy form fitting spandex.   They have stood out as a specialty retailer with high margins and ubiquitous stores.

We’ve discussed LULU a number of times in the past and candidly, the strength of the stock has been surprising.

Given the overall trend of the apparel/retail industry, we think it’s going to be difficult for LULU to surprise on the upside. As is the case with all fashion trends, lower priced imitators begin to compete, margins get thinner and fashion gets stale.  Many momentum indicators have turned down and accumulation of this market darling has abated.  Accordingly, we expect surprises on LULU going forward will be on the downside