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Lululemon recently reported its preliminary financial results based on which we provide a unique peer-based analysis of the company. Our analysis is based on the company's performance over the last 12 months (unless stated otherwise).

Lululemon Athletica Inc.'s analysis versus peers uses the following peer-set: Nike Inc. Cl B (NYSE:NKE), Adidas AG ADS (OTCPK:ADDDF), Yue Yuen Industrial (Holdings) Ltd. (OTCPK:YUEIY), PUMA SE (PUM.DE), Anta Sports Products Ltd. (OTC:ANPDF), Amer Sports Oyj ADS (OTCPK:AGPDY), Billabong International Ltd. (OTCPK:BLLAF) and Li Ning Co. Ltd. (OTCPK:LNNGF). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Quarterly (USD million)2012-07-312012-04-302012-01-312011-10-312011-07-31
Revenues282.6285.7371.5230.2212.3
Revenue Growth %(1.1)(23.1)61.48.413.7
Net Income57.746.673.538.838.4
Net Income Growth %23.7(36.6)89.51.115.0
Net Margin %20.416.319.816.918.1
ROE % (Annualized)33.129.452.230.432.4
ROA % (Annualized)28.924.842.925.828.0

Valuation Drivers

Lululemon currently trades at a higher Price/Book ratio (15.2) than its peer median (8.3). LULU-US achieved a better operating performance than the median of its chosen peers (ROE of 35.5% compared to the peer median ROE of 15.3%) and the market still expects faster growth from it than from those peers (PE of 51.5 compared to peer median of 16.4).

The company has a successful operating strategy with above median net profit margins of 18.5% (vs. peer median of 6.9%) and relatively high asset turns of 1.7x (vs. peer median of 1.2x). This suggests that the company has a dominant operating model relative to its peers. LULU-US' net margin is its highest relative to the last five years and compares to a low of 11.2% in 2008.

Economic Moat

The company enjoys both better than peer median annual revenue growth of 40.6% and better than peer median earnings growth performance 51.1%. LULU-US currently converts every 1% of change in annual revenue into 1.3% of change in annual reported earnings. We view this company as a leader among its peers.

LULU-US' return on assets is above its peer median both in the current period (31.0% vs. peer median 8.7%) and also over the past five years (27.2% vs. peer median 10.5%). This performance suggests that the company's relatively high operating returns are sustainable.

The company's comparatively healthy gross margin of 57.9% versus peer median of 46.5% suggests that it has a differentiated strategy with pricing advantages. Further, LULU-US' bottom-line operating performance is better than peer median (pre-tax margins of 27.5% compared to peer median 7.5%) suggesting relatively tight control on operating costs.

Growth & Investment Strategy

LULU-US has grown its revenues faster than its peers (41.5% vs. 8.1% respectively for the past three years). The market also sees relatively higher long-term growth prospects for the company, giving it a better than peer median PE ratio of 51.5. Overall, we classify the company's growth prospects as superior relative to its peers.

LULU-US' annualized rate of change in capital of 57.2% over the past three years is higher than its peer median of 7.0%. This investment has generated an above peer median return on capital of 35.4% averaged over the same three years. Evidently, the relatively high capital investment was successful given the relatively strong growth in its returns.

Earnings Quality

LULU-US has reported relatively strong net income margin for the last twelve months (18.5% vs. peer median of 6.9%). This margin performance combined with relatively high accruals (2.6% vs. peer median of 0.6%) suggests possible conservative accounting and an understatement of its reported net income.

LULU-US' accruals over the last twelve months are positive suggesting a buildup of reserves. In addition, the level of accrual is greater than the peer median -- which suggests a relatively strong buildup in reserves compared to its peers.

Trend Charts

Company Profile

Lululemon Athletica, Inc. designs and retails athletic apparels primarily in North America and Australia. It offers a comprehensive line of apparel and accessories including fitness pants, shorts, tops and jackets designed for athletic pursuits such as yoga, running and general fitness. The company's products are designed to offer performance, fit and comfort while incorporating both function and style. Its yoga-inspired apparel is marketed under the Lululemon Athletica brand name. The company was founded by Dennis J. Wilson in 1998 and is headquartered in Vancouver, Canada.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Source: Earnings Analysis: Lululemon Athletica