In the past 22 days, the share price of Lululemon Athletica Inc. (LULU, Financial) has popped, as shown in this six-month chart:
The stock is up 21% in the past three months, up 52.2% in the past six months and up 79.7% in the past 12 months.
Does this mean Lululemon is regaining the market’s favor after several years of missteps and controversies? Does it again have faith in this athletic apparel company?
Lululemon describes itself this way in its 10-K for the year ended Jan. 28: “principally a designer, distributor and retailer of healthy lifestyle inspired athletic apparel and accessories.” It also said, “Our apparel assortment includes items such as pants, shorts, tops and jackets designed for a healthy lifestyle and athletic activities such as yoga, running, training and most other sweaty pursuits.”
While customers mostly love the high-end products (the too-sheer yoga pants were an exception), it has found itself caught up in ongoing controversies. Often, they have erupted after comments by the company’s founder and former chairman, Chip Wilson. The outspoken Wilson has personally provoked several eruptions. The most prominent perhaps was his decision to say some women’s bodies “just don’t actually work” for his yoga pants. He no longer appears on the list of Lululemon directors.
To help identify Lululemon’s strengths and weaknesses as a stock, apply the Macpherson model (information about the model available here and here). It quantifies a company's potential as “great company” and whether it is available at a “great price.”
The first table provides a financial analysis (all data originate with the GuruFocus dashboard or All-in-One screener):
No debt, combined with strong showings on return on assets, return on capital and return on equity, makes lululemon look good, at least on the surface. However, the GuruFocus system issues three warning signals:
- Gross margin has been in long-term decline, receding by 1.2% per year on average.
- Operating margin also going down, an average of 8.3% per year over the past five years (it is currently at 18.67%).
- Asset growth has been faster than revenue growth.
The first two warnings should be considered while reviewing data for the criteria for a competitive moat:
Although the moat’s strength has been declining, as per the margin slippage, Lululemon still posts a robust 18.67% operating margin.
The third set of criteria screens for a company’s intrinsic value, or lack of it ("fail" means no intrinsic value or margin of safety):
The GuruFocus system says Lululemon is more suited for earnings-based discounted cash flow and is, therefore, overvalued by more than $66.
Other data
- Revenue has grown by an average of 16% per year over the past three years.
- Margins have slipped, as noted.
- EBITDA has grown over the past three years, by an average of 13.7% per year.
- Dividends: Lululemon does not pay a dividend.
- Buybacks: The company does not repurchase its own shares.
- Price-earnings ratio: 50.64.
- Beta: 0.04, so quite unrelated to the movements of the S&P 500.
Ownership
Eight of the GuruFocus gurus have positions in Lululemon: The biggest holding, by far, is that of Manning & Napier Advisors Inc., which owns 3.4 million shares. Second and third spots go to Louis Moore Bacon (Trades, Portfolio) and Pioneer Investments (Trades, Portfolio), with 490,000 and 176,000 shares respectively.
Of the 10 guru trades in fourth-quarter 2017, three were buys or adds, while the other seven were sell out or reduce.
Institutional investors own 80% of Lululemon’s outstanding shares, while insiders own 0.44%. Finviz reports shorts have 4.63%.
Outlook
In its guidance for fiscal 2018 (ending in January 2019 and comprising 53 weeks), the company expects:
- Net revenue: $2.985 billion to $3.022 billion, compared to $2.6 billion in fiscal 2017.
- Diluted earnings per share: $3 to $3.08 for the full year, compared to $2.59 adjusted ($1.90 unadjusted) in fiscal 2017.
The guidance does not include any potential share buybacks over the course of the year.
In a January 2018 investor presentation, the company pointed to three important growth drivers:
To put the $4 billion of projected 2020 revenue in context, Lululemon earned $2.6 billion in fiscal 2017 and expects about $3 billion for fiscal 2018.
The following chart, showing Lululemon in green, Nike (NKE, Financial) in blue and Under Armour (UA, Financial) in red, illustrates how Lululemon has broken away and ahead of two prominent rivals:
Conclusion
All of that raises the question: Has Lululemon also broken from its troubled past? The company has had good products and a vision that meshed with its target markets, but execution hasn’t always kept up and it has suffered from needless controversies.
Behind the existential questions, the details seem solid: Lululemon has no debt, strong numbers on major financial metrics (except for declining but still strong margins), a strong moat based on its ROC and return on tangible equity and the market once again appears to have faith in its prospects. It’s worth noting that while margins have slipped, EBITDA has continued to grow.
But that enthusiasm for the company has also pushed the share price beyond anything many value investors would pay. They will watch and wait for a significantly lower valuation.
Disclosure: I do not own shares in any companies listed, and do not expect to buy any in the next 72 hours.
