lululemon

lululemon athletic inc.

Revenues and earnings per share have increased at a high rate in the 10 years shown. Book value per share recently declined but this was simply due to share buy backs and is not a concern.

lululemon athletica inc. (lulu, NASDAQ)

RESEARCH SUMMARY

 

Report Author(s):

InvestorsFriend Inc. Analyst(s)

Author(s)’ disclosure of share ownership:

 The Author(s) hold no shares

Based on financials from:

2018 + Q1 ’19

Last updated:

July 2, 2019

Share Price At Date of Last Update:

 $                            180.86

Currency:

$ U.S.

Generic Rating (This rating does not consider the circumstances of any individual investor and is therefore not specific advice for any individual):

 Weak Sell / Hold at $180.86

Has Wonderful Economics?

Yes

Has Excellent and Trustworthy Management?

Yes

Likely to grow earnings per share at an attractive rate over the next decade?

Yes

Valuation?

Quite Expensive

SUMMARY AND RATING:  The graph of revenues per share as well as earnings per share shows very strong and steady growth. Book value per share recently decreased but his was simply due to share buy backs and is not a concern. The Value ratios would indicate a Sell given the very high P/E ratio and despite the very good ROE and growth. Management quality appears strong. The insider trading signal is at least moderately negative given sales at lower prices. And executive compensation is generous but not of any real concern. The outlook seems strong with near-term growth in the lower double digits. The economics of the business is very good as evidenced by the high ROE. It has a competitive advantage in its strong brand position that allows it to sell at high margins. Overall we would rate this as a  Weak Sell / Hold.

LONG TERM VALUE CREATION: Has been very strong.

DESCRIPTION OF BUSINESS: lululemon is “a designer, distributor, and retailer of healthy lifestyle inspired athletic apparel (clothing) and accessories. It contracts out the manufacturing. While head office is in Vancouver and its design activities are headquartered there, lululemon should be considered to be an American retailer/designer with a significant international presence.  As of January 2019 it had 440 company-operated stores in 14 countries. The locations of the stores was 65% in the U.S.A., 15% Canada, 7% Australia, 5% China 3% United Kingdom and 6% spread over 9 countries. 65% of sales are through the 440 company-owned retail stores. Essentially all of its locations are leased and not owned. 26% of revenue was from the “direct to consumer” channel (online sales) and 9% was from other which includes outlet sales and wholesale sales to yoga studios and other fitness centers as well as several licenced retailers in Mexico and the Middle East and also 45 seasonal stores in operation during the holiday season. . 91% of its products are manufactured in Asia (only 12% in China). The average store size if 3030 square feet or the equivalent of 55 feet by 55 feet. There are 15,700 employees, 59% located in the U.S., 27% in Canada and 14% in other countries. Sales averaged $1579 per square foot or $4.78 million per store per year.

ECONOMICS OF THE BUSINESS: The economics are very strong with a 15% bottom line profit on sales and a 34% ROE.

RISKS: See annual report for a discussion of risks. In our view the major risk is to maintain and build customer loyalty in North America and other countries. While ever company faces risks, this does not strike us as a particularly risky company in terms of its future earnings.

INSIDER TRADING / INSIDER HOLDING: Based on data on Yahoo finance the insider trading signal is at least moderately negative given sales at lower prices.

WARREN BUFFETT’s CRITERIA: Buffett indicates that all investments must pass four key tests: the business is  simple to understand and predict (pass), has favorable long-term economics due to cost advantages or superior brand power (pass given ROE and brand power), apparently able and trustworthy management (pass), a sensible price – below its intrinsic value (fail or marginal pass at best), Other criteria that have been attributed to Buffett include: a low  debt ratio (pass – no debt), good recent profit history (pass) little chance of permanent loss of the investors capital (pass) a low level of maintenance type capital spending required to maintain existing operations excluding growth (pass).

MOST RECENT EARNINGS AND SALES TREND: Comparable sales increased 18% in fiscal 2018 and 16% in Q1 fiscal 2019.

COMPARABLE STORE SALES  OR INDUSTRY SPECIFIC STATISTICS: Corrected for foreign exchange rate changes, comparable store sales increased 8% in Q1 fiscal 2019 and 8% in fiscal 2018. Overall comparable sales (including direct to consumer) increased 18% in fiscal 2018. Direct to consumer sales increased 45% in 2018 excluding the 53rd week.

Earnings Growth Scenario and Justifiable P/E: The current P/E of about 40 times expected 2019 earnings is pricing is very strong double digit earnings growth for the foreseeable future.

VALUE RATIOS: The price to book value ratio is unattractively very high at over 17 times – although in part this reflects the high ROE and high growth. The trailing adjusted earnings P/E ratio is very high at 48. And the forward P/E based on management’s projected 2019 earnings is very high at about 40. The ROE is very good and attractive at 34%. There is no dividend. Revenue per share growth in the past five years has averaged 18% and earnings per share growth has averaged 15%. The intrinsic value of the shares is calculated at $142 assuming five year growth will average 16% and the P/E will decline to 25. Overall, while the ROE is proof that this is a very profitable company, the value ratios would suggest a rating of Sell due to the very high P/E ratio.

SUPPORTING RESEARCH AND ANALYSIS

 

Symbol and Exchange:

Lululemon Athletica Inc.

Currency:

$ U.S.

Contact:

0

Web-site:

0

INCOME AND PRICE / EARNINGS RATIO ANALYSIS

 

Latest four quarters annual sales $ millions:

$3,421.0

Latest four quarters annual earnings $ millions:

$505.3

P/E ratio based on latest four quarters earnings:

47.6

Latest four quarters annual earnings, adjusted, $ millions:

$505.3

BASIS OR SOURCE OF ADJUSTED EARNINGS: As reported by management.

Quality of Earnings Measurement and Persistence: High quality.

P/E ratio based on latest four quarters earnings, adjusted

47.6

Latest fiscal year annual earnings:

$483.8

P/E ratio based on latest fiscal year earnings:

49.7

Fiscal earnings adjusted:

$514.6

P/E ratio for fiscal earnings adjusted:

46.7

Latest four quarters profit as percent of sales

14.8%

Dividend Yield:

0.0%

Price / Sales Ratio

7.03

BALANCE SHEET ITEMS

 

Price to (diluted) book value ratio:

                                      17.38

Balance Sheet: The balance sheet is strong with no debt and a large cash position and with almost no purchased goodwill.

Quality of Net Assets (Book Equity Value) Measurement: High quality, but not relevant given the large multiple to book value.

Number of Diluted common shares in millions:

                                131.3

Controlling Shareholder: Founder Dennis (Chip) Wilson owns 9.4%. One investment fund (and/or its unit holders) owns 14.1% and Vanguard (and /or its unit holders) owns 7.4% of the shares. Management and directors as a group own less than 1%.

Market Equity Capitalization (Value) $ millions:

$23,753.6

Percentage of assets supported by common equity: (remainder is debt or other liabilities)

55.5%

Interest-bearing debt as a percentage of common equity

0%

Current assets / current liabilities:

2.3

Liquidity and capital structure:

RETURN ON EQUITY AND ON MARKET VALUE

 

Latest four quarters adjusted (if applicable) net income return on average equity:

33.7%

Latest fiscal year adjusted (if applicable) net income return on average equity:

33.8%

Adjusted (if applicable) latest four quarters return on market capitalization:

2.1%

GROWTH RATIOS, OUTLOOK and CALCULATED INTRINSIC VALUE PER SHARE

 

5 years compounded growth in sales/share

17.6%

Volatility of sales growth per share:

 $                                  –  

5 Years compounded growth in earnings/share

13.5%

5 years compounded growth in adjusted earnings per share

14.9%

Volatility of earnings growth:

 $                                  –  

Projected current year earnings $millions:

not available

Management projected price to earnings ratio:

not available

Over the last ten years, has this been a truly excellent company exhibiting strong and steady growth in revenues per share and in earnings per share?

Yes

Expected growth in EPS based on adjusted fiscal Return on equity times percent of earnings retained:

33.8%

More conservative estimate of compounded growth in earnings per share over the forecast period:

14.0%

More optimistic estimate of compounded growth in earnings per share over the forecast period:

16.0%

OUTLOOK FOR BUSINESS: For Q2 2019, and for 2019 overall, the company expects total comparable sales growth in the low double digits. Earnings per share expected to increase 18% in 2019.

LONG TERM PREDICTABILITY: lululemon has an established track record of growth including internationally and is likely to continue to grow at double digit rates.

Estimated present value per share: We calculate  $104.38 if adjusted earnings per share grow for 5 years at the more conservative (but still robust) rate of 14% and the shares can then be sold at a P/E of 20 and $142.33 if adjusted earnings per share grow at the more optimistic rate of 16% for 5 years and the shares can then be sold at a P/E of 25. Both estimates use a 7.0% required rate of return.

ADDITIONAL COMMENTS

 

INDUSTRY ATTRACTIVENESS: (These comments reflect the industry and the company’s particular incumbent position within that industry segment.) Michael Porter of Harvard argues that an attractive industry is one where firms are somewhat protected from competition based on the following four tests. Barriers to entry (marginal pass, although scale and brand present some barriers to new competitors). No issues with powerful suppliers (pass, although some suppliers have a significant share they could be replaced). No issues with dependence on powerful customers (pass), No potential for substitute products (pass) No tendency to compete ruinously on price (pass). Overall this industry appears to be attractive for lululemon as an established incumbent.

COMPETITIVE ADVANTAGE: Lululemon is positioned as a premium brand ad has strong customer loyalty.

COMPETITIVE POSITION: lululemon would have a small but lucrative share of the total retail clothing industry.

RECENT EVENTS: The store count was increased by 9% in the most recent fiscal year and 58% of the net additions were outside of North America. Including remodeling square footage increased 13%.  The company repurchased 1.5 million shares in Q4 ended February 3, 2019 with monthly prices averaging $116 to $130. Share repurchases were 4.9 million in 2018 (including 3.3 million in a private transaction), 1.9 million in 2017 and 0.5 million in 2016. Significantly higher volumes were repurchased in December as the price dipped with the overall market dip. In fiscal 2018, a new CEO, Calvin McDonald, was hired. In 2017 48 of its ivivva branded stores (serving girls) were closed leaving just s few ivivva locations.

ACCOUNTING AND DISCLOSURE ISSUES: No opinion

COMMON SHARE STRUCTURE USED: Normal, one vote per share.

MANAGEMENT QUALITY: The company appears to be well managed.

Capital Allocation Skills: Appear to be strong given the high ROE above 30%.

EXECUTIVE COMPENSATION: For 2018 executive compensation for the named officers ranged from about $2 million to $4 million except that the new CEO was compensated at 417 million but it appears that much of this was in the form of one-time stock option type pay and would likely be closer to $6 million in a typical year. Overall, compensation is generous but is not a big concern given the size and profitability of the company.

BOARD OF DIRECTORS: Warren Buffett has suggested that ideal Board members be owner-oriented, business-savvy, interested and financially independent. We have no particular opinion regarding this Board at this time.

Basis and Limitations of Analysis: The following applies to all the companies rated. Conclusions are based largely on achieved earnings, balance sheet strength, achieved earnings per share growth trend and industry attractiveness. We undertake a relatively detailed  analysis of the published financial statements including growth per share trends and our general view of the industry attractiveness and the company’s growth prospects. Despite this diligence our analysis is subject to limitations including the following examples. We have not met with management or discussed the long term earnings growth prospects with management. We have not reviewed all press releases. We typically have no special expertise or knowledge of the industry.

DISCLAIMER: All stock ratings presented are “generic” in nature and do not take into account the unique circumstances and risk tolerance and risk capacity of any individual. The information presented is not a recommendation for any individual to buy or sell any security. The authors are not registered investment advisors and the information presented is not to be considered investment advice to any individual. The reader should consult a registered investment advisor or registered dealer prior to making any investment decision. For ease of writing style the newsletter and articles are often written in the first person. But, legally speaking, all information and opinions are provided by InvestorsFriend Inc. and not by the authors as individuals. The author(s) of this report may have a position, as disclosed in each report. The authors’ positions may subsequently change without notice.

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