Apple (NYSE: AAPL) and Tiffany (NYSE: TIF) recently had the highest-grossing retail stores in North America, in sales per square foot. No surprise there. But guess who’s No. 3? Vancouver, Canada-based Lululemon Athletica (NYSE: LULU), which makes and sells high-end yoga and athletic wear. LULU’s 150 stores in North America generated a record $1 billion in sales last year. Another 36 percent revenue jump is expected in 2012.

Consumers, mostly younger professional women, are willing to pay more—close to $100—for LULU’s stretchy yoga pants with flattering waistbands and assortment of tops. Higher pricing and control of the sales channel has kept LULU’s operating profit margin at roughly 28 percent, vs. around 12 percent for Nike (NYSE: NKE) and Under Armour (NYSE: UA).

Like any high-profile growth stock, LULU is vulnerable to the slightest hint that its growth may subside. The biggest threat now is coming from The Gap (NYSE: GPS). Its new “Athleta” stores are popping up in proximity to LULU locations and offering the same community-building approach—yoga classes, discounts to yoga instructors—but with pricing that’s 25 percent to 30 percent less. However, LULU has an established brand that is expanding in a growing market. So we think it can continue to maintain its revenue growth and profit margins, even as Athleta entices away the more cost-conscious consumers.

Stretching Out

The $14.3 billion US market for women’s athletic gear is growing twice as fast as women’s general apparel. This growth is being boosted by yoga. Some 22 million Americans practice yoga today, up fivefold since the 1980s. Stylish, comfortable and durable yoga wear commands higher prices, due to fabrics such as LULU’s trademarked “Luon” and “Transluxent,” which wick away perspiration and reduce odors.

Currently, LULU has 175 stores (in the US, Canada, New Zealand and Australia) vs. an estimated 35 Athleta stores (by 2013). LULU is planning to double its store count to 350 in the next five years, many of these in Europe, Asia and Latin America. The expansion is led by CEO Christine Day, who joined the company in 2008 after 20 years at Starbucks, most recently there as head of Starbuck’s Asia Pacific Group. Continued weakness in the dollar, which is likely, will provide a tailwind for this overseas expansion, as will the lack of debt on LULU’s balance sheet and $444 million in cash.

LULU is also expanding its product line into dresses and skirts, as well as men’s clothing, which was recently 25 percent of sales. And the company’s online sales are taking off, surpassing $100 million last year. In the second quarter of 2012, LULU’s online revenue rose 91 percent to $35.4 million, close to 13 percent of the company’s sales (up from 9 percent in 2011).

There are LULU imitators, but none so far has been able to replicate the fabric quality or the design. The company has design patents it’s willing to defend, most recently filing a lawsuit against Calvin Klein and G-III Apparel (NYSE: GII).

LULU’s price-to-earnings ratio of 48 may give investors pause, but a PEG ratio (price-to-earnings growth) of just 1.4 percent places the company much closer to fair value than its competitors.

Recently trading near $72, LULU’s shares are down about 12 percent from the 52-week high, due to competition fears. If the company continues to grow as the higher-priced offering within the growing women’s athletic wear sector, it’s a strong buy on dips below $70.