Lululemon athletica (LULU) is a yoga-inspired athletic apparel company. It creates products that help people to remain active and stress free. The black Luon pant recall on March 18, 2013 damaged the company's reputation and also compelled its CEO Christina Mccormick Day to announce her resignation after being at the helm of the yoga-war giant. Though the company announced later that the CEO's resignation was voluntary, the timing is still questionable. This news had a negative impact on the stock price of the company. Thus, the company had to cut its third quarter earnings forecasts as the trend is expected to continue till the end of this year. In this article, I am going to analyze the company's long term financial performance and its future outlook.
Lululemon markets its apparel under the brand names of lululemon athletica and ivivva athletica. Its products are designed to offer performance, fit and comfort while incorporating both function and style. The company also continues to broaden its product range to increasingly appeal to male athletes and athletic female youth. As of February 3, 2013, its branded apparels were sold through 135 stores in the United States, 51 stores in Canada, 23 stores in Australia and two in New Zealand.
Stock Performance Graph
The historic stock performance of the company gives you an idea of the investor's perception regarding the past performance of the company. The comparative stock price performance graph below is not necessarily indicative of, nor is it intended to forecast, the future performance of the company's stock.
The above graph compares the cumulative total stockholder return on common stock between FY08 and FY13, with the cumulative total return of S&P 500 Index and S&P 500 Apparel, Accessories & Luxury Goods Index, over the same period. This graph assumes the investment of $100 in FY08 at the closing sale price of company's stock, the S&P 500 Index and the S&P Apparel, Accessories & Luxury Goods Index. Over the six year period, the company's stock has shown tremendous growth. The upward movement reflects the company's business growth which occurred at a CAGR of 25.4%, whereas S&P 500 index and S&P Apparel, Accessories & Luxury Goods Index grew at a CAGR of 1.4% and 8.6%, respectively.
Over the years, the company has recorded tremendous growth in its revenue, as shown by the linear line. Over the last five years, the company's revenue grew at an impressive CAGR of 40%. This growth in revenue was driven by increased sales at locations in its comparable stores base, sales from new stores opened, and the growth of its direct to consumer segment.
Corporate-owned comparable store sales increased by 16% in FY13, compared to FY12. Revenue from direct-to-consumer segment increased by $90.9 million, or 86%, to $197.3 million in FY13 from $106.3 million in FY12. The increase in revenue of its direct-to-consumer segment was primarily due to an increase in traffic, conversion rates and average order value on its e-commerce website, as well as making its products available in new markets outside of North America. The company was able to translate its top line growth into its bottom line which resulted in higher operating and net margins.
To analyze the management's profit-generating efficiency, I have conducted a DuPont analysis. Higher ROE is generally favorable which means that the company is efficient at deploying capital. Consistent growth in net margins transformed into higher ROE for the company, which is a positive signal for the investors. A high return on equity means that the company is doing a good job of growing profits without adding new equity into the business. A return on equity of 36.35% shows that the Lululemon has a competitive advantage over its peers. However, if you want to check how much Lululemon would earn if it was operating at zero debt level, you will see that the ROE drops to 30.20%. In other words, 30.20% return was earned due to the company's operational efficiency, while only 6.15% return was earned due to the debt injected into the business. This indicates that the stock of Lululemon poses an attractive investment opportunity.
The company has a history of reporting positive earnings surprises. However, currently the company's financial performance has been adversely affected by the recall of yoga-pants, delivery delays and the abrupt resignation of its CEO. The measures taken by the company to address the faulty Luon incident earlier in 2013 should prevent similar mishaps from occurring in the future.
On the plus side, the company has started to broaden its product line. Previously, the company was targeting a broad spectrum of women, ranging from teenagers to retirees. However, the recent addition of mens' apparel is likely to boost Lululemon's sales. Moreover, the company stands to benefit from improving productivity, increased store count and focused merchandising in its trendy and quality-focused apparel in the near term. Keeping in mind that the company has a strong history of beating analyst expectations, along with its improving productivity and increasing store counts signal that the company is committed to creating value for its shareholders. I believe that investors should consider this stock as a long term investment opportunity.