(Lululemon) (Lulu)

Overview of the Company - Lululemon is in the consumer cyclical sector with a market cap of a little more than 52 billion. Lululemon sells apparel relating to working out, yoga, and lifestyle for men and women. They mainly sell in their own brick and mortar stores but also are sold through outlets, gyms and online. As of January 31st, they operated 521 stores in over 15 countries. Lululemon also recently acquired Mirror in may of 2021. Mirror is a home workout studio inside a traditional mirror.

Fundamental Analysis - My thesis since the beginning of my own investment has been the idea of generational purchasing. This isn't some fancy term, but it’s something that I quite literally made up. Let me walk you through why I believe the biggest thing Lulu has going for it is generation purchasing.(and what exactly it is) When I got my first pair of Nike socks, I never wanted to go back. I wore my first pair of Nike socks in the 9th grade. They were a gift and when I added them to my wardrobe I gradually started noticing that I wanted to wear them all the time. They were cooler, more fashionable, and looked better than all my other socks. Nike didnt know it yet, but they had just gained another lifetime customer. Nike and Lululemon are more than just clothing companies, they are a brand. Everyone knows this. What many people don't realize is how powerful brands are. When I become a father, what am I going to get for my kids to keep their little footsies warm? Nike Socks. When they need shoes to go outside, what will I get them? Nike Shoes. When they want to go to football practice, what am I going to get them? Nike Cleats. The same is true with Lululemon. Except Lulu resonates with the younger generation more. Now I understand that Lulu offers men's apparel, but the majority of their sales are in the women's section directed at yoga. For that reason I will focus on that aspect for now. When these young women grow up or when they decide to have kids, what do you think they will get for them? I am willing to bet that they won't have their kids go back to a non name brand (blasphemy!) They wouldn't dare put them through the suffering, they want their kids to experience wearing name brands like they did. They will get them the Lululemon leggings, just like how I will get my kids the all important Nike's. Sure Lululemon’s stock is expensive, but I don't believe that the market has accurately accounted for the fact that for generations to come parents will be purchasing their kids Lululemon apparel. I know a lot of this is anecdotal evidence but trust me when I say, if I had five bucks for every person I saw with that little Lululemon handbag they give to you for free when you purchase at a store, I wouldn't be here writing this article. You'll find me in the 90210.

How (Lululemon) Stacks Up to Competitors - We will be comparing Lulu to Nike and Under armour, which are both competing apparel brands. Lulu has a market cap twice as large as Under Armour, but both do not even come close to Nike's market cap of over 25o billion compared to Lulu’s 50 and under armour’s 25. Under Armour comes in last in categories of profitability and return on assets and equity. Therefore, it really is a two horse race. Nike loses in profitability, but has a substantially higher return on equity. All three companies have relatively high year over year revenue growth but it is worth noting that Lulu is actually last by a small margin in this category. This may be due to Lulu’s stronger dependence on their brick and mortar stores that are still being limited due to the pandemic. All three companies have fairly strong balance sheets as Nike and Lulu have more cash than debt. Looking back to 2018 it is noticeable that Lulu has had much more consistent revenue growth than Nike, but Nike is the only company in the group that offers a dividend.

Bull Case - There are two ways Lululemon can deliver returns to shareholders. It must either trade at a higher multiple - which is highly unlikely since it already is quite expensive, or it can raise revenue and increase profitability. By increasing EPS numbers they can justify their multiple and increasing share price. Lululemon also has a ace up their sleeve with Mirror which I believe is very sleek and stylish, it has the possibility to revolutionize the home workout industry.

Bear Case - This stock has priced in a lot of growth already. If Lululemon is unable to deliver on this growth it will most likely be forced to trade a much lower multiple. Furthermore, as the economy reopens Lululemon may see a sharp decline in sales for their most recent addition to the company, Mirror. In addition, Mirror faces stiff competition from other workout brands like Nordictrack, Peloton and Tonal. Regardless of their competition, gyms are open and full. The last thing a lot of people want to do is stay at home and work out. This may slow sales, which may lead to lower earnings and cause Lulu to trade at a more reasonable valuation like Nike. If Lulu trades at Nike’s current P/E with the same EPS we could very well see Lululemon trade at around the $243 range, which would lose you over a third of your investment.

Valuation and My Price Target - I believe that Lulu has to increase revenue and I believe it can. With its incredibly high profitability, Lulu can ensure EPS growth and justify their valuation. I believe that in the next year Lulu can get to over 5 billion in revenue, increasing its EPS to 6.3. Assuming that they can achieve this in earnings, Lulu does not have to become a more expensive stock to bestow their shareholders with profits. With EPS of 6.3 and no change in P/E we get a stock price of 445.22. This indicates approximately 16.9% upside from here.

The Verdict - BUY HOLD SELL

At the time of my personal investment, Lulu was trading at relatively the same Price to earnings ratio as Nike with higher profitability. While Lulu is still more profitable, Lulu’s P/E is now much larger than Nike's. This does worry me. I think this competition really comes down to what each individual investor is looking for. I believe that the data supports and shows what each company is focused on. Lulu is focused on growth and untapping new potential with its acquisition of Mirror. Nike is focused on sustaining its revenue and profit, steadily growing and being a cash cow that pays a dividend. Finally, for investors with a little more risk tolerance looking for a company with a relatively small market capitalization and the desire to invest in a company that is lesser known, all while trading at closest to its tangible book in the group, Under Armour is the play. Regardless of which company you go with, my personal choice would be Lulu. Sure, the S and P usually can be guaranteed to earn 7% a year and more recently it has returned over 14% on average, not to mention the 20% YTD performance. However, this is very unlikely to continue and I believe that a 17% ROI combined with the fact that this a quality retailer, and the opportunity for generational purchasing is prevalent, I would recommend Lulu as a BUY.

*all data provided by yahoo finance and nasdaq.com