Lululemon Athletica (LULU, Financial) reported good sales growth in its business operations in its first quarter earnings on June 8.
Lululemon delivered a 17% growth in sales to $495.5 million compared to the same quarter last year, but the company delivered a -5.17% growth down to $45.3 million. Observably, the company grew its cost of goods sold by 17.79% and its selling, general and administrative expenses by 31.7% compared to the same time frame last year. This growth in overall business expenses led to its profit reduction in the quarter.
Regardless of the quarterly change, Lululemon expects to achieve total sales of between $2.305 billion to $2.345 billion this year. Those figures would represent roughly (on average) a 12.8% growth from 2015's sales figures. Also, the company expects profits between $282 million to $296 million representing an estimate of 8.53% growth.
From 2010 to 2015, Lululemon had a sales growth average of 31.7% and profit growth average of 32.6%. Lululemon's shares, in return, had provided a 28.64% average annual total return over these years. The Standard & Poor's 500, on the other hand, had 13.9% in the same time period.
Lululemon Athletica
Lululemon Athletica is a Canadian athletic apparel retailer founded in 1998. According to its recent annual filing, the company is a designer, distributor and retailer of technical athletic apparel. The company markets its products through two brand names namely lululemon athletica and ivivva athletica. Further Lululemon offers a comprehensive line of apparel and accessories for women, men and female youth.
The company primarily conducts its business through two channels: company-operated stores and direct to consumer. In fiscal year 2015, company-operated stores contributed most (73.59%) to Lululemon's total sales. As a result, most of the company's profits also came from company-operated stores (66.8%). Lululemon also entered into license agreements in the Middle East whereby its partners have the right to operate lululemon athletic branded retail locations in the area. According to the company, there were two licensed stores in the United Arab Emirates that were not included in the aforementioned store count.
(Lululemon Athletica Store, Image Source)
As of Jan. 31, Lululemon operated 363 company-operated stores of which most (63%) were located in the U.S. The rest of its stores are found in Canada, Australia, New Zealand, the U.K., Singapore, Hong Kong, Germany and Puerto Rico. The company also had websites www.lululemon.com and www.ivivva.com to generate ecommerce sales. The company seems to have most (88%) of its stores under the brand lululemon athletica.
Found in its clothing is the company's trademarked fabric called Luon. According to the Business Insider, the Luon is a primary fabric found in most of Lululemon's performance wear products, from yoga pants to headbands. In 2015, the company had Luon fabric present in approximately 30% of the fabric used in the company's products. Luon, as describe by the news website, is 86% nylon and 14% Lycra.
In addition, Lululemon has several other intellectual properties found in its products, such as Silverescent, Pace Breaker, Rulu, Scuba, Wunder Under, among others.
(Lululemon Wunder Under Pant, Company Website)
Dividends
For dividend investors, Lululemon would not even be part of the list since it never issued any dividends for the past 10 years. According to its annual filing, here is the company’s stand regarding dividend payouts:
“We have never declared or paid any cash dividends on our common stock and do not anticipate paying any cash dividends on our common stock. Any future determination as to the payment of cash dividends will be at the discretion of our board of directors and will depend on our financial condition, operating results, current and anticipated cash needs, plans for expansion and other factors that our board of directors considers to be relevant. In addition, financial and other covenants in any instruments or agreements that we enter into in the future may restrict our ability to pay cash dividends on our common stock.” –Â p. 16, 2015 annual report
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Share repurchases
On the other hand, Lululemon had been actively repurchasing its shares for the past five years. In my calculation, the company had been able to repurchase about 2.3 million shares since November 2015 to the first quarter at an average price of $50.86 per share.
Cash, debt and book value
As of May 1, the company had $550 million in cash and no debt. Lululemon also had a book value of $1.14 billion with just 2.23% as goodwill and intangibles. The company’s book value had grown to a five-year average of 24.56%.
Cash flow
In the first quarter, Lululemon had $39.7 million in cash flow from operations. The company paid out $26.6 billion in capital expenditures leaving it $13.09 million in free cash flow. In return, the company returned most or 99.3% of its free cash flow to its shareholders through share repurchase.
Valuations
According to GuruFocus data, Lululemon has a trailing 12-month price-to-earnings ratio of 41 times, price-to-book value of 8.7 times and price-to-sales ratio of five times. These are well above what the broader S&P 500 has. S&P 500 has a price-to-earnings ratio of 25 times and price-to-book value of 2.89 times.
Conclusion
Lululemon Athletica seems to demonstrate an outstanding company not only in terms of developing its own brand and moat through its products, but also in providing shareholder returns through stock repurchases in recent years. Interestingly, both these qualities propelled the company’s shares to its previous all-time high of $81.43 a share; its share price currently trades at $77.65 a share.
Further, valuing Lululemon using its past five-year earnings, sales and book value multiple gave me a valuation of $81.64 a share. This valuation indicates that there is, but just little more room left in terms of aiming a good investment while applying a considerable margin of safety.
A commentary by Jason Zweig on p. 399 of the revised edition of the "Intelligent Investor" provided an example of determining a good margin of safety requirement: “Longleaf’s Hawkins likes to find what he calls '60-cent dollars,' or companies whose stock is trading at 60% or less of the value at which he appraises the businesses. That helps provide the margin of safety that Graham (Benjamin) insists on.”
Nonetheless, it seems that finding 60-cent dollar companies are rare nowadays, even in recent years except for the energy and mining sector, which may signal that most of the stocks are overvalued. But personally, I would require at least a 20% discount on any company’s shares. So, $77.65 or a discount of 4.89% would not make me like Lululemon’s current share price.
Disclosure: I do not have any Lulu shares nor plan to initiate a long/short position this week or the next.
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