Tuesday, December 14, 2010

Lululemon Stock & My Commentary =)

As one of my favorite stores, I tend to pay attention to news about Lululemon.  Since a large part of expectation of earnings, and hence, stock price is due to analyst estimates and recommendations, I figured I would look into it a little more closely.  I am an analyst after all!  Except I specialize in fixed income, not equities.  Hehe.  Last week Lululemon stock price went to an all time high following the announcement of strong 3rd quarter earnings.  I almost bought call options the day before the earnings announcement at strike price of $65, but decided it was too risky because that was a big jump.  And then of course it went above $65!  Ugh!!!  I could have made about $20 grand!!  The same thing happened in Q2 as well.  I mean overall I think I "lost" about $100,000 from sitting out!  I could have made back all the money I've spent there, and then some!

Ok, not all is lost.  Let's take a look at some Bloomberg data for LULU.

The peer comparison to Bloomberg peers, which are basically all different public retail companies.  Not necessarily a good representation of Lulu's main competitors, but still worth a look.

Check out the sales growth and total return compared to the peers and S&P500 index - crazy!!

The company is obviously in a supernormal growth mode.  They don't pay out any dividends, and their growth rate (which is purely return on equity) is almost 40%.  Here's a comparison between Q3 2010 and Q3 2009.  It's a lot of boring numbers to look at, but almost all the growth rates have increased.

(Click to Enlarge)

All the ratios look solid as well - they've increased profitability, increased investments, increased turnover in receivables, inventory, and shortened cash conversion cycles (increasing liquidity).  They have TONS of cash, and almost no debt.  This means they can expand and invest/acquire more stores without financing.  Here are some of the financial ratios.

I think sometimes a graph is really worth a thousand words.....

What's interesting (and a good thing) is that they've increased their cash and equity while keeping liabilities and other expenses relatively constant.

Here again, revenue and income increased while cost stays pretty much constant over these quarters.

Ok so all looks good.  I then decided to see what the company is up to in terms of expansion.  I found some interesting news that I was not aware of - they are buying back franchises.  They've increased their lululemon australia holdings from 13% to 80% in May, and it in turn became their subsidiary.  They've also reacquired the franchise in Saskatchewan in July.  This is why we can see below that their sales from franchises have decreased, while sales from corporate owned stores and wholesale (website and phone sales) have increased.  Dramatically for the latter.  They are really focusing on their online store.

And from this following chart, we can see that the sales in the US and Asia Pacific (Australia and Japan) have increased dramatically as well.

I think Bloomberg made a typo with regards to the 2009 and 2010 numbers for Asia Pacific - in 2010 it probably should be closer to 7.59.  The US growth I can attest to.  While I almost never see people at my gym who do not wear Lululemon, I also go to Equinox and sometimes different pricey private studios so the clientele have more disposable income.  But lately I've been seeing more and more Lululemon just out and about - people in groove pants running errands, hoodies, etc.  I see the Define Jacket almost everywhere I go now.  In the past, I've always seen girls at my gym wear one piece of Lulu, most commonly Groove pants, but more and more so recently I've been seeing full on Lulu outfits, including the newest items that just hit the stores.  I've also seen more guys wear it as well.  And I see Lulu shopping bags everywhere too!  So the brand is definitely gaining popularity fast. 

But I also find it strange that with all the popularity, Lululemon does not trademark any of their performance fabrics.  A big part of their selling point is the quality of their performance fabrics such as luon, luxtreme, silverescent, etc.  In fact, they don't even have long term contracts with raw material suppliers which is pretty risky as the suppliers can 1. increase the price unexpectedly and in turn increase cost for Lulu, and 2. umm stop supplying under short notice and disrupt Lulu's inventory flow.  As much potential as this company has, they really need a solid senior management team in order to stay afloat with their rapid growth rate.  Brand loyalty will fade if they lose quality and reputation.  

Anyway, like I said, I'm not a stock analyst and I did my research in like 15 minutes.  Lol.  But I do have training in this area, and I can see why most brokerage houses give Lulu a "hold" or "sell" recommendation instead of "buy".  Lululemon option has some of the highest implied price volatility.  The company is growing at a unsustainable rate and its stock is valued too high.  I'm always cautious when I read about positive financials and earnings because there's so much room for management manipulation in order to beat earnings estimates and increase stock price (Lululemon has lots of employee stock options).  But with that said, a lot of times you can identify a stock that is incorrectly priced too high, but that doesn't mean people won't be buying it at the inflated price.  Back during the dot com bubble, a lot of arbitragers tried to take advantage of the stocks they thought were priced too high by shorting them.  But one after another, those "over valued" companies were acquired by other companies who paid even higher prices.  The arbitragers might have correctly identified the stocks, but they couldn't help that someone else was willing to pay more than their worth, and they still lost lots of money in the end.

So, I believe it definitely is a feat that Lululemon has tripled its price during this economic downturn. I think the brand has more loyalty and following than analysts give it credit for.  I should know that first handed.  That of course, is something that cannot be measured by monetary value.  Perhaps it is being captured in the stock price and it's not over valued after all.  I see good things happening, and I think I will take the plunge.  The last quarter is usually the best quarter for Lululemon due to holiday sales.  Also, as we can see below, its holdings right now are primarily among investment advisors.  Due to the high volatility and potential for appreciation, more hedge funds and mutual funds might pick it up which just might increase the price $10-15 more.  I don't care if it's over priced or under priced, I'm not here to correct market inefficiencies.  I just want to make money!  Hehehe

So, I think it's still a great short term investment for Q4.  But I'm not sure about long term holding of the stock.  I would just bet on the option and try to make money on the intrinsic value.  I'm really hoping that I won't be too chicken to actually make the purchase, and maybe I will make some cash to buy more Lulu clothes!


  1. Thanks for this! I bought at about $43, so I'm excited, but not planning to sell anytime soon.

  2. what a great post! Thanks for writing this. I've been wondering what your thoughts were on this.

  3. This was one of their more recent acquisitions. Probably a mortgage free location.

  4. Just a note, the stores in Asia Pacific are in Australia and Hong Kong not Japan as you mentioned.

  5. @Lulumum: Very interesting! Is it a lease or did they actually purchase it?

    @Addy: Actually I did mean Australia and Japan. Lululemon had 4 stores in Japan which they shut down in 2008.

  6. It sounds like Bentall LP who owned the building was planning to re-develope it into high density condos so they must have sold it to Lululemon instead.


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