Lululemon Is A Sell, Despite Growth And Profit Potential

Jul.15.13 | About: Lululemon Athletica (LULU)


Lululemon (NASDAQ:LULU) is a stock that presently is valued high with growth potential already accounted for. The company has growth potential abroad and domestically with store expansion and newer lines. LULU's strongest areas are growth, financial health, and profitability. While the company shows promising numbers in multiple areas, our price target analysis is forecasting a drop in stock price, which is why we rate LULU as Sell.

Click to enlarge
(Click to enlarge)


Lululemon Athletica Inc.'s value lands right in the middle of a neutral rating for us, and overall we see the stock as overvalued. The company's future P/E is 30.7, and we look for value below 15, which means that presently the company is overvalued. While we tend to look for value under 1.0 for Price/Sales LULU is at 8.3. The company also shows weak value ratings in price/book and debt-to-equity ratios.

There is a discrepancy between LULU's strong value ratings in Price/FCF and Price OCF, which both scored 10 while both Price/Sales and Price/Book scored 1. Why are Price/Book and Price/Sales so high for LULU compared to Price/FCF and Price/OCF? LULU reports 289 in OCF and 188 in FCF. This means the company is generating a large amount of money from operations and investments. The high price/book and price/sales ratios indicate that LULU's stock is valued much higher than the company itself is valued.

The company's Debt-to-Equity ratio is important at 0.0 as it shows high value. PEG shows a company's value in comparison to its growth capabilities. At 1, the company is very valuable in comparison to growth. LULU is slightly above that marker at 1.8. LULU is projecting growth for the future but not without certain caution signs.

All in all LULU's value is neutral based on very strong ratios like Price/FCF, Price/OCF, and Debt-to-Equity. Most of their other ratios in this category are very weak suggesting an over compensation of growth potential priced into the stock leading to overvaluation.


LULU is rated as positive in the growth category with a score at the low end of the positive window. The company has shown considerable growth in multiple areas in the past five years with more growth projected for the forward fiscal year.

Two areas in this category that are very strong for growth are LULU's 2014 Sales Growth and their 2014 EPS Growth. In their June 2013 vision and goal setting presentation LULU identified what it perceives as its growth drivers. They are the North American market, the International market, and their smaller men's and Ivivva lines. North America remains LULU's most promising area for growth. The company is at about a third of its 300-store goal with a rate of new stores opening at around 30-40 per year. The lesser recognized but growing lines of men's clothing and Ivivva, their line for younger girls, is also a key component of their North American market.

LULU will be focusing its global expansion in Hong Kong, the UK, Germany, and Singapore. The company plans on opening 15 showrooms internationally with an ecommerce component. Once these showrooms and ecommerce sites generate enough brand recognition, the company will proceed with building stores.

While not an identified growth driver, LULU's Ecommerce business, now only four years old, accounts for roughly 16% of the company's revenue. This area is projected to grow to around 20% of total revenues in the year.

Overall we see a history of growth with continued expansion into the forward fiscal year. The company has outlined multiple initiatives to create a larger presence in international markets and domestically. Some of the lower growth rates we see for 2013 LULU attributes to preparation for future expansion.


Profitability is one of LULU's highest rated categories. The company is showing strong profit margins across the board. Let's look at how these numbers compare to other competitors in the apparel manufacturing industry.

LULU's biggest competitors are Nike Inc. (NYSE:NKE), Under Armour, Inc. (NYSE:UA), and Adidas AG (OTCQX:ADDYY). These companies report their operating margins at 13%, 10%, and 8% respectively. Their gross margins are 44%, 48%, and 48% again respectively. With LULU reporting their operating margin at 27%, and their gross margin at 55%, this company is clearly turning a profit at a much higher rate than its closest competitors.

What is helping LULU hit such high profitability margins?

LULU reports some initiatives they have been operating under in order to boost their profitability ratios. To increase their gross margin they have lowered the sales mix of core items, lowered their use of airfreight, invested in quality, testing, factory oversight, and product development, and benefited from the foreign exchange. Under their SG&A, LULU has invested in IT systems and strategic initiatives, and worked on international market planning and seeding.

All in all the company is extremely profitable and is taking measures to sustain these margins in the forward fiscal year.

Cash Flow/Efficiency

LULU lands in the middle of our neutral range for Cash Flow/Efficiency. There are some outstanding ratios in this category, but are counterbalanced by other very weak areas.

Again we see that OCF/Sales, very high at 20.4%, and FCF/Sales, strong but not incredible at 13.7%, indicate large cash flows, but that they have seen 0% growth over the past five years. OCF is important to stockholders because it is what is used to pay off dividends. FCF is important to see to believe that dividend hikes can occur. These numbers are promising for the future, although we saw earlier that LULU is not strong for dividend returns.

Solid cash flow is also helpful to pay off debt levels and improve the business without taking on more debt, which can help improve profitability. Since LULU does not have any debt, they can funnel all of these funds into other areas of the company to further improve productivity.

One red flag that we see as we look at Efficiency ratios in comparison to the previous section on profitability is that LULU is being extremely profitable but is only mediocre in areas of efficiency. This could very well be a sign of decline for the company as reflected in our price target analysis. The company may not be able to sustain profitability where it stands without the right efficiency infrastructure.

Let's compare LULU's efficiency to the competitors. NKE shows Day Sales Outstanding at 45.7, Days Inventory at 76.0, and Cash Conversion Cycle at 83.4. ADDYY shows 57.8, 112.6 and 136.0 respectively in these same areas. Finally, UA shows 42.0, 118.1, and 119,4 again respectively. What these numbers show is that for the industry there is a slower cycle and that LULU still shows the best numbers. The last ratio in this category that is very strong is Receivable Turnover. LULU is at 237.4 for this ratio indicating that the company is extremely efficient in how it uses its assets.

Financial Health

Financial health is strong for LULU. The company's current ratio at 7.0 is above the 1.0 threshold we look at for financial health, and the quick ratio at 4.9, both of which are mediocre ratios. How do these ratios compare to their competition?

UA's current ratio is 4.3 and their quick ratio is 2.4. NKE's current ratio is 3.4 and their quick ratio is 2.1. Lastly, ADDYY's current ratio is 1.8, and their quick ratio is 0.9. From these numbers we see that LULU again has the strongest numbers, though none of the ratios are extremely strong.

LULU's lowest score in this area is their Interest Coverage Ratio. At 0.0 they scored the lowest possible. At first glance this seems like a weak spot for LULU but the low score is actually due to the fact that the company doesn't have any debt on which to make interest payments. No debt is overall very good for the company.

LULU is doing very well in most areas of the category because they do not have any debt. All the ratios using debt or current liabilities to calculate the ratio, like Debt/Equity, Gross Profit to Current Liabilities, Operating Cash Flow to Current Liabilities, and Cash & Cash Equivalents to Total Liabilities, are strong and score highly for the company.

Overall, LULU has good financial health since they are not working off any debt. We will have to see if they can maintain their financial health with their global and domestic expansion projects.


Lululemon Athletica Inc. has some intriguing growth opportunities. The larger opportunities revolve around the company's domestic and international expansion, as well as newer lines that LULU is beginning to emphasize.

As was briefly outlined in the growth section, the company recently identified three main areas of future growth: North America, International, and Men's & Ivivva. We will look at each of these areas in more detail in order to assess how much growth can be achieved and in what time frame.

Currently LULU has 186 stores in North America. With Vancouver, Canada as their headquarters the company sees this region as a priority for expansion. The company reports that their ultimate goal is to establish 300 stores in North America, but does not give any concrete plans about moving forward toward this goal. LULU does report that they have been growing at a yearly rate of 15-20 stores domestically. We can assume that the company will continue at this rate of growth since they have not outlined any plans to proceed at a faster pace.

In the international market LULU has 25 stores in Australia and New Zealand. The company has reported serious investing in international market planning and seeding to prepare to establish a more global presence. While LULU did announce they are planning on focusing on Hong Kong, the U.K., Germany, and Singapore, again there were no concrete details on this expansion effort. We cannot at this point count on the returns of those investments.

LULU was founded as a women's athletic wear provider. The company has recently developed men's and female youth lines. The men's line is available through e-commerce and in stores. The Ivivva line is not yet available in stores or online but it has been identified as a major focus for the company moving forward.

In addition to these larger areas of potential growth LULU is continuing to offer innovative and stylish products to their customers through new seasonal lines. They are offering new running shorts for women with different styles to fit different body types and different fitness routines. The newest men's pieces include tee shirts, tanks, and various shorts for different activities.

A last catalyst to mention is LULU's marketing strategy connected with the Tour de France. LULU is one of the sponsors of the BMC Racing Team from Switzerland. This is a technique for the company to create more awareness domestically and especially abroad. This could be a great initiative for their global goals.

Price Target Analysis

Step 1.

Project operating income, taxes, depreciation, capex, and working capital for five years. Calculate cash flow available by taking operating income - taxes + depreciation - capital expenditures - working capital.

2013 Projections

2014 Projections

2015 Projections

2016 Projections

2017 Projections

Operating Income


















Capital Expendit.






Working Capital






Available Cash Flow






Click to enlarge

Step 2.

Calculate present value of available cash flow (PV factor of WACC * available cash flow). You can calculate WACC, but we have given this number to you. The PV factor of WACC is calculated by taking 1 / [(1 + WACC)^# of FY years away from current]. For example, 2016 would be 1 / [(1 + WACC)^4 (2016-2012). WACC for LULU: 6.1%






PV Factor of WACC






PV of Available Cash Flow






Click to enlarge

Step 3.

For the fifth year, we calculate a residual calculation. Taking the fifth year available cash flow and dividing by the cap rate, which is calculated by WACC subtracting out residual growth rate, calculate this number. Companies with high levels of growth have higher residual growth, while companies with lower growth levels have lower residual growth. Cap Rate for LULU: 4.0%


Available Cash Flow


Divided by Cap Rate


Residual Value


Multiply by 20167PV Factor


PV of Residual Value


Click to enlarge

Step 4.

Calculate Equity Value - add PV of residual value, available cash flow PVs, current cash, and subtract debt:

Sum of Available Cash Flows


PV of Residual Value


Cash/Cash Equivalents


Interest Bearing Debt


Equity Value


Click to enlarge

Step 5.

Divide equity value by shares outstanding:

Equity Value


Shares Outstanding


Price Target


Click to enlarge

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no business relationship with any company whose stock is mentioned in this article. The Oxen Group is a team of analysts. This article was written by David Ristau, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.