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Why Lululemon Is Still in Fashion, and How BlackBerry Got Back in Fashion

Motley Fool Staff, The Motley Fool

Consumers can be fickle when it comes to both apparel and technology, but when you have what they want, it's off to the races. Yoga-inspired athleisure-wear stalwart lululemon athletica (NASDAQ: LULU) turned in strong fourth-quarter report and offered similarly upbeat guidance. At its core, its success has been powered by its ability to predict where tastes are headed, but there's much more going on behind the scenes.

And speaking of behind the scenes, BlackBerry (NYSE: BB), the tech company that once dominated the proto-smartphone market has been busily reinventing itself as a communication software company, and its latest results show just how well it's been doing on that front.

In this segment of the Motley Fool Money podcast, host Chris Hill and Fool senior analysts Aaron Bush, Ron Gross, and Jason Moser first discuss how the apparel company has been more than holding its own in an extremely competitive landscape, and ask whether its growth rate and other factors give it a compelling investment thesis, despite the high P/E ratio it's trading at now. Then, they shift to a discussion of BlackBerry, and how it has leveraged its long-standing security expertise to gain ground in the IoT and automotive markets. They also reveal the surprising business segment that now accounts for the largest share of its revenue.

A full transcript follows the video.

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This video was recorded on March 29, 2019.

Chris Hill: Shares of lululemon athletica hitting an all-time high this week after a strong fourth-quarter report, and Ron, equally strong guidance for 2019, too.

Ron Gross: This company just keeps rolling along. Really impressive. Revenue up 26% with comp sales up 17%. Their in-store channel, comp sales were up 7%. Direct to consumer up 39%. Turns out the China market loves their athleisure, because online sales there were up 140% during the quarter. They're doing great job with cost controls, which led to margin increases, and therefore adjusted earnings per share were up 39%. The company continues to really execute. As you mentioned, guidance was very strong as well. Stock's trading at 36 times that guidance, so it's not a "cheap" company, but they're putting up great growth, so maybe it is actually reasonable.

Hill: Why do you think they've been able to succeed in an area that really should have more competition? Five years ago on this show, we were talking about Nike and Under Armour getting into the yoga wear space and saying, "Look, they make quality stuff at Nike and Under Armour. This may be trouble for Lululemon." And it really hasn't been.

Gross: These specialty retailers, it always comes down to their merchandising and their buyers and putting the proper product into the stores. They consistently do that well. They get rid of the stuff that isn't going well. When they need to be promotional, they are. But they're constantly putting stuff in the store that people come back for.

Hill: BlackBerry, the business that once dominated the mobile phone market, is trying to rise from the ashes as a communication software company. Fourth quarter results were good enough to push shares of BlackBerry 10% higher on Friday. Aaron?

Aaron Bush: BlackBerry has had quite the transformation over the past decade. Even if you look at their growth and their profitability, and it looks pretty tepid, underneath that their software business is really taking off. BlackBerry's expertise has always been around endpoint security, first with their phones, and then they've taken that same expertise to software to cover lots of different devices. They cover the Internet of Things, they help enterprises secure all their various different devices. They play a role in car security now, which is interesting. There is a market for their software.

But one other side effect of a long technical history in wide-ranging areas is that BlackBerry has also built a pretty robust and valuable patent portfolio. What surprised investors, I think, this quarter is that their licensing business jumped 71% to nearly $100 million, becoming the largest revenue segment of this quarter. When that type of hidden growth that people weren't really paying attention to much before starts to become more meaningful, the market starts paying attention. I think that's what's going on today.

Aaron Bush owns shares of Under Armour (A Shares) and Under Armour (C Shares). Chris Hill owns shares of Under Armour (A Shares) and Under Armour (C Shares). Ron Gross owns shares of Nike. The Motley Fool owns shares of and recommends Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool recommends BlackBerry and lululemon athletica. The Motley Fool has a disclosure policy.