About Lululemon Athletica
I pretty much don’t care what anybody says, Lululemon Athletica, better known among the masses simply as Lululemon, is kind of a cult.
Whether or not I am walking on the outskirts of my university’s campus or am in the heart of campus, it is pretty much easy as all get out to be in the presence of a man or woman showing off their new Lululemon shorts, bodysuit or other frankly ridiculously overpriced accessories that are well enjoyed by the masses, especially those of the female persuasion.
Take Austin, Texas for example.
In and around the Austin metropolitan area, from the heart of downtown to the suburban malls there are Lululemon stores crawling with consumers trying on some of the company’s products while being mildly stalked by an in-store associate just waiting to tell you that the $200 bodysuit just looks great on you in order to notch a sale and sell through some inventory.
Great for investors in the company’s stock, questionable on the morality spectrum.
Of course, in addition to its physical store locations, the company also generates a considerable amount of its total revenues through e-commerce sales done through its website.
It is also worth noting before we delve into the company’s core financials that irrespective of whether or not we are Lululemon’s target customer, this organization has and is still continuing to develop an enormous following, which inherently leads to brand loyalty, which means more sales over time for the company at hand.
The moral of this story is that it doesn’t necessarily matter what we think about a company, but rather what the masses think.
Although it’s important for one to form their own opinions, one has to be objective enough and willing to face the facts.
We’d also like to add that even though we don’t consider ourselves to be the company’s target consumer, we will admit to once paying a visit to one of its stores in Austin and thinking to ourselves “wow, this in-store ambiance is spot-on.”
Natural lighting thanks to large windows, digital product catalog directories never more than a few feet away from shoppers, the most hummable, un-obnoxiously loud music in the background making for an upbeat consumer experience and the actual faces of the company, its well-dressed yet approachable employees.
Say what you want about Lululemon (as we certainly will) and its absolute cult-like following, but this company does customer interaction and engagement right.
Now seems like an appropriate time to see if the company has its finances in order and ultimately, if its stock (NASDAQ: LULU) is worth buying and holding indefinitely.
Lululemon’s stock financials
With a market capitalization of a substantial $48.37 billion, a share price of $380.39 a price-to-earnings (P/E) ratio of 56.56 along with an annual dividend of zilch distributed to its shareholders, much is still fairly uncertain regarding our opinion(s) regarding Lululemon and its stock, but thankfully it’s just the first inning.
Candidly, it is rather difficult for us to make any confident or maybe even lofty, assured statements regarding the company’s current valuation without first looking at its total revenue over the last few years, which we will do momentarily.
First, however, let’s look at the overall state of Lululemon’s balance sheet and see just how fashionable it may or may not be.
According to TD Ameritrade’s platform, the company maintains around $5.6 billion in terms of total assets along with approximately $2.5 billion in total liabilities.
At first blush, we were a bit shocked, as despite all of the fixed and variable costs and other associated expenses this company has incurred during the worst of COVID-19, not to mention the recent supply chain stresseses imposed on retailers and others around the globe, Lululemon’s executive team has successfully managed to tame its total liabilities in comparison to its total assets, in a major way we might add.
This is quite encouraging given the current state of the economy and the likely approaching slowdown in consumer spending, as this company is apparently prepared to endure a bad season or two and still come out on top given the fortitude of its balance sheet.
This is a great, distinct competitive advantage.
Onto another financial statement of interest, the company’s income statement.
Evidently, the growth has been very real for Lululemon Athletica.
Specifically, in 2019 the company’s total revenue stood at a hair below $3.3 billion, rising the following year to just under $4 billion, upping itself the next year to $4.4 billion, further extending and extending some more to its latest reported figure of $8.1 billion (reported on 1/29/2023).
Sure, price hikes during 2019 and beyond probably had something to do with the increase in revenue, however, we think this revenue growth can also be attributed to greater overall brand awareness and developed loyalty, which subsequently lead to more sales.
Heck, there are student ambassadors all over the United States tasked with bringing more and more folks to Lululemon and its products, especially those among the younger generations.
This is why we not only understand this company’s recent growth in total annual revenues, but suspect that in the coming years, hard landing-style recession or not, its revenue will continue rising.
Loyalty is loyalty is, you guessed it, loyalty.
Moving right over to the company’s cash flow statement, Lululemon’s net income over the same span of time has generally grown and has miraculously remained positive as well.
The same can also be said regarding its total cash from operations, which isn’t a small feat in the retail sector.
Lululemon’s stock fundamentals
Operating as an emerging leader in the specialty retail playground certainly has its fair share of benefits.
One of which happens to include the ability to attain a more than competitive trailing twelve month (TTM) net profit margin than that of its very stellar competition.
Specifically, according to TD Ameritrade’s platform, Lululemon has a TTM net profit margin of 10.54% to the industry’s average of 10.05%.
Sure, at face this might not seem like a huge deal, however, for a company with the stature, track record and prominent scaled growth of Lululemon, this is by no means anything to scoff at.
One of the usual prices paid for growth is a considerably lower TTM net profit margin, however, this company seems to be bucking this trend quite well given that it is growing while also out-profiting the competition (on average) on a TTM, net basis.
When it comes to the company’s TTM returns on assets and investment(s), Lululemon has also found a way to stay ahead of the industry from this perspective as well.
Particularly, according to TD Ameritrade’s platform, the company’s TTM returns on assets and investment(s) are pegged at 16.21% and 22.34%, respectively, whereas the industry’s averages are tucked in away at 13.07% and 17.42%, also respectively.
These are material differences that prospective investors should take into consideration, as it speaks heavily to this company’s operational efficiency as well as its capital efficiency.
A consideration for Lululemon
All of this being said, it is our opinion that consolidation, after the dust settles following the current recession, is inevitable in the retail sector and there is one company we deem to be an excellent suitor for Lululemon.
Enter Nike.
For those who somehow aren’t familiar with Nike (no offense, but come on now), this Beaverton, Oregon-based company that has quite literally changed the sports scene has led and frankly continues to lead the athleticwear space by miles.
Thanks to its well designed marketing campaigns, the company has made a fortune through and for its athletes, such as the likes of arguably the greatest professional basketball players of all time, Michael Jordan and LeBron James, without a shadow of a doubt the most talented golfer ever, Tiger Woods, prolific tennis legend John McEnroe and a host of plenty of other all-star athletes that have benefited as well as have been great beneficiaries of Nike.
You also can’t forget about the Swoosh.
Simply put, it is our viewpoint that Nike, a currently $193 billion company should look into wholly acquiring Lululemon before it grows too much and becomes unattractively expensive.
To us, Nike targeting Lululemon Athletica would make perfect sense and simply be the icing on the cake for the company’s founder, Phil Knight, who at the time of the company’s official founding (1964) has been an innovator, and to stay well ahead of the competition after he not only departs from the company but from Earth, might want to rest assured that the company’s legacy of innovation continues through fellow athleticwear market and consumer captivator, Lululemon.
Additionally, while Nike generates a substantial amount of its revenues through its shoes, this would be a fantastic opportunity for the company to deepen its claws into the expansive specialty workout apparel space.
Yes, buying out Lululemon, a currently $48 billion company would cost a pretty penny, but we think it would be well worth it in the long run as this would allow Nike to maintain and solidify its dominance in the athleticwear space while also integrating Lululemon’s technologies, all having a high likelihood of the company (Nike) producing copious amounts of enhanced long-term shareholder value.
Should you buy Lululemon stock?
Acquisition or not, this is a phenomenal company.
To us, Lululemon is sort of like the Tesla of retail.
Rapidly growing, specialty, high-end and intriguing to the younger generations (Gen Zers and Millennials, specifically) are just a few ways in which this Canadian retailer and Tesla are similar.
While we initially had our share of doubts regarding whether or not Lululemon was (and is) growing at a quick enough rate to justify paying an objective premium (on a price-to-earnings basis) for its shares, we have a clearer picture of this company.
An immensely loyal consumer base, strong profit margins, a clean-as-a-whistle balance sheet, growing total annual revenues and unusually solidified return metrics, we think all of this should culminate into a “buy” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.