This Is One Healthy-Looking Name

 | Jan 13, 2012 | 9:30 AM EST
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A couple of weeks ago I had the opportunity to chat it up with Jill Malandrino, who spearheads the OptionsProfits site for the The Street. Mid-sentence, we both caught ourselves saying find fun in unearthing derivative trades off one company's good dealings or painful misfortune.

If you're unfamiliar with the process of finding derivative plays -- not to be confused with trading actual derivatives -- just remember it's a search for the less obvious investment opportunities.

We'll get back to that in a bit. Meanwhile I'll reiterate that, as I have been saying in this week's columns, the retail sector hasn't yielded a load of good cheer. Yet, a single event has left an impression on me: Lululemon's (LULU) massive revenue guidance hike for its holiday quarter. Almost instantly afterward, analysts -- who were apparently asleep this holiday season -- awakened and increased their own earnings estimates on the company. They sang the praises of Lululemon's tight-fitting yoga wear (I do love their bags) and then tuned in to CEO Christine Day giving a live interview on a financial news network.

Indeed, this was the week of returning Lululemon mania, and it was kind of enjoyable getting wrapped into the company's story once more. The stock's pullback from its 52-week high in July had removed it from discussion as a sexy investment, which was sad, considering the retail sector was so darn boring to cover for most of 2011.

But, returning to the pursuit of derivative trade investing, let's think about the implications of Lululemon's successes. First, it's not just any old person who frequents the company's small-square-footage, boutique-feeling store locations. These are more affluent female heads of households, or single, sassy young ladies who are workout enthusiasts. They are exploring the virtues of Crossfit by watching YouTube videos and signing up for the tortuous classes at the local gym.

In short, they demand the versatility that Lululemon merchandise offers to them, which allows them to go from sweating in a hot yoga class to striking up a conversation with the dark-haired mystery man at the supermarket straight afterward. So, for the purposes of this piece, what's important here is that the Lululemon consumer is a workout buff who has the financial means and inclination to live a healthy lifestyle.

What I've done is taken this, and referred back to that solid earnings report from Nike (NKE) that is so easy on the eyes these days amidst the retail carnage -- and the dot-connecting has led yours truly to Vitamin Shoppe (VSI). In fact, this stock advanced 5% during a week when the Retail HOLDRS (RTH) has traded flat, and high-end consumer plays such as Tiffany (TIF) and Williams-Sonoma (WSM) have gotten smacked around. To me, that's quite intriguing.

For extra icing on the cake, Vitamin Shoppe's fourth-quarter earnings estimates actually rose in December -- as expectations across the retail landscape were trending into the ground.

A Few More Tidbits on Vitamin Shoppe

• Fiscal 2012 guidance has already been disseminated, which removes the element of surprise. It also seems conservative, given the fundamental trends in the business -- for example, Vitamin Shoppe's sports nutrition line, which is the biggest revenue-generator for the company, is growing at the quickest pace.

• Product margin improved in 2011 and costs were controlled. The crop report Thursday was rather benign (soybeans in soy protein, oh yes), so the amount of leverage in the company's business should show through nicely in 2012 as costs become tamer.

• New store openings are accelerating in 2012, with 52 planned this year, vs. 48 in 2011.

• The company has proven expense discipline.

• It undertakes constant editing of the merchandise assortment in order to remove unproductive items.

• Finally, it has engaged in large recent improvements in short-term liquidity measures. Debt reduction has helped in this regard.

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