Categorized | Dividend Kings

Respect Your Universe: The Next Lululemon?

Respect Your Universe: The Next Lululemon?

One great way to make money in equities is to find a growth company in a growth business, but do so before the company actually grows so the stock is dirt cheap. As for the business, it makes no sense to invest in a new and better sewing machine manufacturer, for instance, as sewing is not a growth industry. One industry that fits the bill for a true growth industry is mixed martial arts. As established sports leagues and events as popular as the National Football League and NASCAR have experienced actual drops in attendance these past few years, mixed martial arts bills itself, quite correctly, as the fastest growing sport in the world. That makes the arena of providing product and services to the mixed martial arts industry an attractive proposition to any company.

One company that is in a position to take advantage of both the growth of mixed martial arts and the fact that its primary target audience is persons under 35 years of age is Respect Your Universe (RYUN). It is a young company, with limited sales to date and no profits. It describes itself on its website as “a premium training apparel and equipment company rooted in and inspired by mixed martial arts.” Yet, when looking at any sort of developmental company, one must first look at the managers. When it comes to Respect Your Universe, I like what I see. Its Chief Executive Officer and Director, Christoper Martens, is formerly an executive at Nike (NKE), specifically serving as its General Manager and Merchandise Director. He served also as Global Director of Apparel for the Beijing Olympic Games in 2008. Prior to Nike, he served eleven years in the apparel division at Eastern Mountain Sports.

John Wood is President of Respect Your Universe, and also a board member. Prior to coming to his current position, he was Director of Customer Development at two major Las Vegas nightclubs, putting him in contact with many of the promoters and participants in Ultimate Fighting Championship events. He is also a martial arts expert on his own accord. His contacts make him the “point” man for Respect Your Universe’s efforts to become the “inside” apparel maker for the mixed martial arts community.

Steven Eklund is the Chief Financial Officer. He has decades of experience in finance with large consumer operations like Nike, General Mills (GIS), and Eddie Bauer. He is 64 years old, substantially older than the other officers, and will add a nice bit of seasoning to the management team.

The other director, Erick Siffert, is Chief Operations Manager. He too has decades of experience in operations, much of that for Nike. All told, this is an idea combination of experience, contacts, and energy for any developing company to be lucky to have. This team gives me great confidence that Respect Your Universe will have every chance to succeed.

Respect Your Universe purports to base its products on foundation beliefs in respect, strength, honor and sustainability. Its products all have special markings, taken from ancient Swahili iconography to designate it is a moisture wicking fabric “Air Weave”, a weather resistant fabric “Wind Weave”, thermal control fabric (Fire Weave), and environmentally friendly fabric (“Terra Weave”).

Respect Your Universe sells a wide variety of performance athletic and leisure wear for indoor and outdoor, competition and training. All its products either incorporate recycled materials, or organic fabrics. Offerings are for men and women, everything from performance shorts to hoodies and duffel bags. The bulk of its sales have been through its web site, but inroads have been made with national retailers also such as Von Maur department stores and Eastbay. Earlier this month, Respect Your Universe reached an agreement to open its first, and flagship, retail store in Las Vegas. It will be placed in an upscale mall, across from a Burberry (BURBY) store.

I do not know of any company as uncompromising to quality and environmentalism as Respect Your Universe purports to be. Its biggest downside is it has no real track record. It has a market capitalization of a little less than $40 million, and trailing 12 month revenue of $67,000 through March 31, 2012. At that time it held a little more than $2 million cash on hand,
.5 million in inventory,
.8 million in deposits, and $1.7 million in prepaid expenses. The company recorded a loss in the second quarter of the year of $1.94 million, and since the inception of the company in 2008 has recorded a cumulative loss of a little over $10 million. It carries virtually no long term debt.

This company bears all the hallmarks of a young company in its development stage. It will begin to receive real revenue in the current quarter through its new retail marketing partners and its web site, which only because operational in February of this year.

Perhaps the “grown up” company that most resembles what Respect Your Universe might someday be is Lululemon Athletica (LULU). This high cap ($8.8 billion market capitalization) company has achieved terrific growth without taking on long-term debt. Its operating margin of 28% is more than double Nike’s and Under Armour’s (UA). Its return on equity of 35% is outstanding in any sort of business. And best of all, it is selling at a lower 5 year PEG than Nike, Under Armour or Adidas (ADDYY). Lululemon has obtained this enviable record and position by securing a market, in its case the yoga market, and from that position it is chewing on the virtual heels of Nike and Under Armour in running and other athletic apparel. That, in my opinion, is the way for Respect Your Universe to sustain years of growth. Secure the mixed martial arts market, and then slowly make inroads in other athletic or fashion areas. Time will tell.