Updates on Lululemon Athletica, Willis Lease Finance, and Brown-Forman; Interview with Greenlight Capital's David Einhorn

1) In yesterday's e-mail, I shared my friend Steven Levinson's bearish take on Lululemon Athletica (LULU). A different friend who owns the stock e-mailed me to critique Steven's take:

If you read the transcript from LULU's first-quarter earnings call, they aren't currently taking markdowns – but are including it in their guidance to be conservative, based on possible economic uncertainty.

[Selling, general, and administrative (SG&A) expenses are] up due to strategic investments into distribution and other areas. If you trust the management to be a good steward of capital, which I'd argue it has been, you should welcome these investments.

Sure, LULU today isn't the same hyper-growth LULU of old, but it's still growing – unlike many of its peers – and has unmatched [return on invested capital].

I shared this with Steven, and he replied:

LULU's management did, in fact, mention markdowns in their earnings call, with more expected throughout the year. LULU is carrying elevated inventory and said current trends mirror last quarter – with over one-third of the quarter already complete. That's concerning, as inventory rose 23% [year over year] vs. 7% sales growth. Management also cited a 200 basis point gross margin decline driven by markdowns and tariffs.

Distribution was called out as a capex driver, not SG&A – though related operating expenses will hit SG&A over time. Store-driven inventory growth will impact net working capital and, combined with a lower [earnings before interest, taxes, depreciation, and amortization ("EBITDA")] and pre-tax income base and higher spending, compress near-term free cash flow.

He continues:

Distribution-related capex brings lasting SG&A drag. The margin benefit from recent SG&A efficiency gains may not persist. As the Jefferies analyst noted: "The company raised full-year SG&A deleverage expectations... escalating costs suggest LULU is struggling to contain them, undermining profitability."

Your friend is right: SG&A and China investment are real. But the U.S. remains the core business. While China contributes outsized EBIT, negative comps and tariffs in the U.S. are headwinds. China's long-term opportunity won't offset near-term domestic softness.

Steven concludes:

Bottom line: To be bullish, you must believe in sustained top-line growth – with China outpacing U.S. declines.

Longtime readers have no doubt noticed that I frequently write about certain companies again and again, sharing different updates and viewpoints.

That's because one of the keys to being a successful investor is learning about a lot of companies and then following them over an extended period, looking for opportunities when their stocks get clobbered and disconnected from underlying intrinsic value. I call this developing a big "bench" – like in baseball, where players wait until being put into the game.

With that, let's take a look at two more companies I've been following...

2) I've written quite a few times about aircraft-engine leasing company Willis Lease Finance (WLFC), so I was interested to see someone on my favorite stock-idea website, Value Investors Club, pitching the stock of a similar business: aircraft lessor Air Lease (AL). Since only members can see recently posted ideas, here's a summary of the pitch:

Air Lease is trading at 0.9x book value and they should more than double their earnings over the next 3 years as they: 1) begin to deliver aircraft with lease rates signed in a tight supply/demand market (approximately a two-year lag between signing a lease and delivering the aircraft), 2) capture an increase in yields on recently extended leases, and 3) begin to roll off COVID era leases that are well below (30%) current lease rates...

The airplane leasing market is tight. Lease yields are 15-20% higher than pre-COVID and Air Lease expects to grow its asset base by about 20% over the next several years. As a result, I expect [earnings per share] to double to near $10 per share by 2029, from around $5 in 2026.

Air Lease's earnings move like a steamship. That's because they have long-term (8-year) leases that provide a lot of visibility into future earnings power. These aren't short-term spot-rate leases, like you would see with an ocean shipping business.

I was curious to see whether my banking-expert friend, whom I've quoted many times regarding WLFC, was familiar with Air Lease – and, sure enough, he was. He e-mailed me:

We are also bullish on AL and think it has significant upside – it's our 4th largest position (in addition, AerCap (AER) is our 6th largest and AerSale (ASLE) is our 7th largest)...

Of course WLFC is our largest and highest conviction idea, but they all benefit from the incredible scarcity of both aircraft and engines.

We have been really surprised that the market doesn't seem to get how big this supply/demand imbalance is, as evidenced by these stocks trading at discounts to their liquidation value, even though they're significantly growing earnings.

We've never seen a sector so underpriced relative to fundamentals.

(As background, I first shared my friend's thoughts on WLFC in my February 8, 2024 e-mail. And I shared his updates earlier this year on January 14, February 3, March 14, and May 12.)

3) Stock charts like this one of spirits maker Brown-Forman (BF-B), best known for its Jack Daniel's whiskey, make my value-investing heart race:

I first wrote about the stock in my November 13 e-mail and did a deeper dive on December 17. In the latter, I showed that it's a very high-quality business, with high margins and healthy cash flows.

That said, I correctly identified some warning flags:

Brown-Forman looks like a classic high-quality cash-cow business. But it has shown little growth... its capital allocation has been uninspiring... and I'm not seeing any new line of business or big trend that's likely to change this.

In particular, given the explosion of wealth across the globe among the elite, other luxury-goods businesses – such as LVMH – that serve high-end customers have been able to grow their top line and margins substantially over the past couple decades... meaning their profits have soared. So I was surprised and disappointed that Brown-Forman hasn't done the same.

With the caveat that I haven't met management, the financials tell me that this is likely an undermanaged business.

In addition, with the stock trading around $43 that day, the valuation was still too high to interest me:

The stock is trading at about 5.7 times revenue, 18.6 times EBITDA, and 24.0 times this year's estimated earnings per share...

My instinct and experience tell me that fair value for a stock like this might be 18 to 20 times current-year earnings, meaning I would only be interested in buying it at, say, 13 to 15 times earnings. (Normally I look for 50-cent dollars, but I would pay closer to intrinsic value for a high-quality business and low-risk stock.)

I concluded that it was worth keeping on the radar:

So I'll keep an eye on Brown-Forman and hope the stock gets whacked by a bad quarter or two... At that point, the valuation might get low enough where it looks like a good buy.

Well, I got my wish. Brown-Forman has continued to underperform, and the stock is down 35% since I last wrote about it, hitting a 12-year low recently and closing at $27.66 yesterday.

It was down 18% last Thursday alone after reporting dismal earnings for the latest quarter. Revenue declined 7%, and both operating income and earnings per share tumbled 45%.

Worse yet, guidance for the upcoming year calls for further declines, as detailed in this Wall Street Journal article: Jack Daniel's Maker Brown-Forman Forecasts Tough Year Ahead. Excerpt:

Brown-Forman, the maker of Jack Daniel's Tennessee Whiskey, expects organic sales to decline this fiscal year as demand slows amid shifting tariffs and uncertainty about the economy.

The spirits and wine company said Thursday that it is still facing pressures that are specific to the alcohol industry, including the advent of weight-loss drugs, rising cannabis use and lower alcohol consumption among younger generations.

The bigger concern, however, is that swirling tariffs and concerns about a potential economic downturn have eaten away at consumer spending, Chief Executive Lawson Whiting said on a call with analysts.

"It's the consumer," Whiting said. "Their wallet just doesn't have as much money in it."

Analysts have reduced their earnings-per-share estimates for the next year to $1.67. That means the stock is now trading at only 16.6 times this year's expected earnings, near the lowest price-to-earnings (P/E) ratio since the aftermath of the global financial crisis, as you can see in this 25-year chart:

BF-B is definitely moving to the top of the list of stocks my Stansberry's Investment Advisory team and I will be looking at...

If we decide it's compelling enough to recommend, as always, our subscribers will be the first to know. (If you aren't an Investment Advisory subscriber already, you can find out how to become one right here.)

4) I enjoyed this Bloomberg interview with my longtime friend David Einhorn of hedge fund Greenlight Capital. Here's a summary:

Greenlight Capital Founder and President David Einhorn discusses the challenges of value investing in the current market environment, his investment approach, and the performance of his fund over the years. Einhorn expresses concern about the US government's fiscal and monetary policies, which he believes are fundamentally inflationary. He speaks with David Rubenstein on this week's episode of Bloomberg Wealth. This episode was recorded April 10 in New York.

Best regards,

Whitney

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