This will be a short post today but there was a news story that was running on CBC radio the other morning while I was walking to work with Lululemon Athletica Inc. (LLL) CEO Christine Day was commenting on the surprising demand for their products in Q3 of their 2010 fiscal year.
Normally I wouldn’t pay any attention to the news specifically except for a conversation with a few friends over the Christmas holidays about LLL being “the hot stock for 2011.”
My perception is always that a “hot stock” really means it was hot, people noticed and the likelihood of it continuing to do well (YoY up 117%) is quite low.
Now I haven’t taken a hard look at LLL since its IPO but I do know that women my wife’s age (22-30) absolutely love their products as casual wear & gym wear. Oprah certainly helped the company out when she gave a non-sponsored endorsement of their products in 2010 but one comment by their CEO caused me concern.
It really goes back to an old post I made on this blog titled The 5% Rule. In the post I described one of my Value Rules where paying attention to sales is vital for a company to maintain control.
“Two companies: ABC & XYZ forecast revenues for the upcoming quarter. When the earnings reports are released, ABC reports an unexpected increase of 15% in quarterly revenue where XYZ reports an expected decrease of 4.5%. Which company appears to be in better financial shape?
I want to invest in a company that can consistently & accurately forecast consumer demand, costs & profitability. This indirectly shows me that the company has control over their business model, products and a secure understanding of their target market – with the target market being the key element. They can accurately anticipate consumer demand, habits, wants & needs in order to control their business and portfolio of products.”
I want a manager that can take the pulse of their business at any given time and know where demand & supply are situated so decisions can be made. If you can’t accurately forecast demand or meet it management does not have control of the business. Now Lululemon’s past year might have been a fluke, but my feeling is that they’re riding the wave of demand more than building a system where management has control and the foresight to meet supply & demand.
This doesn’t immediately appear in the profitability of a company, but time after time this example of The 5% Rule has shown me the failure a successful company makes when they can’t properly forecast supply or demand and ultimately end up losing control. Forecasting affects marketing, sales, manufacturing and finances. A company whose management publicly admits that they didn’t expect this level of growth is admitting that they couldn’t take the pulse of their business when it was necessary.