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LULU engages in the design and retailing of technical athletic apparel, mainly in North America and Australia. The products are a wide range line of apparel and accessories including fitness pants, shorts, tops and jackets for athletic pursuits such as yoga, running and general fitness. In fiscal year 2010, LULU’s items were sold through 137 stores located in Canada, the U.S. and Australia. The company does not own or operate any manufacturing facilities, and it does not contract directly with the third-party vendors for fabrics and finished goods. LULU is working with around 45 manufacturers, but with high concentration; four of them produced around 65% of the products in fiscal 2010. In terms of manufacturing locations, 60% of the total products are manufactured in China, 26% in South East Asia, 4% in Canada, and the rest from other countries.
LULU has a very liquid and strong balance sheet when looking at its financial statements. As of October 2011, it had a cash position of around $277 million, taking 43.5% in the total assets of $636 million. Then the next big item is on the inventories and the PPE. In the financial statement, the current D/A ratio is only 16.8%; however, it hasn't included the operating leases for its stores in the book. The total undiscounted operating leases from 2011 to 2015 and thereafter were reported around $250 million total. If we roughly take that into account, we would have total liabilities of $357 million, increasing the D/A substantially to more than 40%, making the financial position no longer so attractive as before.
The good thing about LULU is the ability to generate very high return on equity, due to the high net profit margin.
| 2007 | 2008 | 2009 | 2010 | |
| Net Margin % | 11.23 | 11.14 | 12.87 | 17.12 |
| Asset Turnover | 2.42 | 1.93 | 1.75 | 1.76 |
| Return on Equity % | 41.29 | 29.5 | 30.05 | 39.09 |
However, if we include the operating leases into the total assets to reflect the true asset turnover, the turnover would be much lower. In the other side, it would push the financial leverage up to offset the lower asset turnover.
For valuation, with the first glance, the stock would be considered extremely expensive to value investors. At the current price, the market values the whole company at 50.7x earnings and more than 35x cash flow, 7.6x sales and 10.7x book value. But it is somehow comparable to the previous valuation that the company received by the market.
| 2007 | 2008 | 2009 | 2010 | TTM | |
| P/E | 169.5 | 12.6 | 52.4 | 51.3 | 44.8 |
| P/B | 22.6 | 2.8 | 8 | 11.2 | 10.4 |
| P/S | 14.4 | 1.6 | 5.4 | 7.8 | 8.3 |
| P/CF | 117.6 | 9.8 | 31 | 31.8 | 41.3 |
When the company went IPO and got listed in the middle of 2007, it was valued at quite high valuation as we can see above, with the P/E and P/CF at three digits. Then it was subject to the free fall at the end and the beginning of 2009, with earnings yield of nearly 8%, and P/B only 2.8x.
How about the insider action over the years with LULU? Have they initiated any new buys? Or have they kept selling? Or a mixture of both? Please have a look at the table below:
A very consistent action from the insiders, including the founder and owner, its CEO and its directors is the sell. With the action from the insiders unloading quite a large amount of shares for the last two months, the investors should be worried if they are still holding large position in this stock.
LULU has become a 25 bagger in just 2.5 years, and the stock price has put LULU at quite high valuation in any measures. Even though the company has delivered quite high return on equity over the last four years, but with the high valuation plus the consistent selling from the insiders for the last two months, I think LULU should not be considered for value investment at this current price. However, this company might be kept on the radar and if the stock price drops substantially in the future, then I might initiated a long position. But not right now.
This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk.
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Dear anh,
In reference to you candidacy in CFA Program
I think it's violation of SPC VII B of Ethics part of CFA Program.
I dont think there is such a thing called "CFA Level 3 Candidate".
It should say "June 2012 Level III CFA Candidate".
Rgds,
Hari Bodduna