My 'first look' at Lululemon Athletica

Nike (NKE) isn't the only apparel company on my radar – and I have my friends and readers to thank for that...

After I wrote about its beaten-down stock on August 9 and August 12, a number of folks suggested taking a look at another beaten-down stock of a well-known apparel company: Lululemon Athletica (LULU).

It's a much smaller company – with $9.8 billion in revenue and a roughly $33 billion market cap versus $51 billion and about $125 billion for Nike, respectively. It's also much more focused on North America, which represents 73% of its sales versus 39% for Nike.

Lululemon's initial growth was driven by innovative women's yoga apparel... but the company has since branched out into indoor training, men's sportswear (roughly 30% of sales), and even running shoes (though this is less than 5% of sales).

I remember thinking about shorting the stock soon after the company went public in 2007. The valuation was high and yoga pants seemed like a fad. But fortunately, I mentioned this to a friend... who warned me that because of how the company's tights fit – and the resulting look – there was "no price [a woman] won't pay for them."

It was a bit of a sexist comment, to be sure. But his observation helped save me from what would have been a terrible short.

There's a broader lesson here, which I captured in a slide from a presentation entitled The Art of Short Selling that I put together in 2017:

Lululemon has continued to develop stylish and innovative apparel that its customers (myself included) love, which took its stock on an incredible run to more than $500 per share last December. But since then, it has been cut nearly in half – as you can see in this one-year stock chart:

This is possibly presenting investors with an opportunity to buy a great company on the cheap... so let's take a closer look today.

As I usually do, I'll break my analysis into two parts – covering the financial history today... and then tomorrow, taking a look at the story, why the stock is down, the valuation, and what the future might hold.

As always, I'll start with a two-decade chart of revenue and net income. As you can see, Lululemon has been an incredible growth story over the long run:

Lululemon has strong gross, operating, and net margins of 58%, 23%, and 16%, respectively, over the past year that are the envy of the retail sector:

Turning to the cash-flow statement, we can see that Lululemon's operating cash flows track net income – a good sign – and that it generates gobs of free cash flow ("FCF") – an even better sign:

Lululemon's balance sheet is pristine, with no debt – just lease obligations, which are more than offset by plenty of cash. Here's the history of the company's net cash position:

So how has Lululemon been using its prodigious cash and cash flow? In the past decade, it has bought back $3.6 billion worth of stock:

As a result, the diluted share count has declined by a modest 13% from the peak in 2013:

In summary, Lululemon's financials paint a beautiful picture: exceptional top- and bottom-line growth... steady, high margins... robust FCF... a pristine balance sheet... and solid capital allocation.

So why has the stock been nearly cut in half since late last year? And could it be a buy at these levels?

I'll discuss this tomorrow with the rest of my analysis, so stay tuned!

Best regards,

Whitney

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