Lululemon is primarily known as a manufacturer of high-priced yoga leggings. The company started as a specialist for yoga clothing and accessories, but has evolved into a provider of a wide range of sportswear. With a focus on function and appearance, the high-quality provider is very popular among the young urban population, particularly in the USA.
Profitability
The company is consistently very profitable. This is a rarity for business models that sell directly to end customers and particularly in the case of clothing, and at the same time one of the statistically most important indicators for long-term rising prices. Both the total and equity returns average 29% and 19% respectively, which is in the absolutely optimal range. These margins put profit in relation to equity or equity plus debt. They indicate how much profit is generated annually in relation to investments. With a return on total capital of 20%, the company pays for itself within 5 years. An extremely strong value and an excellent indicator of a good business model.
Lululemon also hits the optimal range for other margins. The EBIT margin, which puts profits before interest and taxes in relation to revenue, is optimal for a large consumer goods manufacturer in the range of 20% to 30%. Above this, future difficulties become more likely. On the one hand because the business area is so interesting that competition will grow, on the other hand because balance sheet manipulations become more likely. Lululemon is growing into this range with steadily slowly increasing margins. In 2017 the margin was still at 18%, now it is 22.6% of revenue that remains as profit.
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Finances
In the area of finances, there is nothing to complain about, even though this area can generally provide fewer "edges" for such companies than profitability and valuation. The equity ratio is solid at 64%. Debt is very low, particularly debt compared to cash flow. In the last year, debt was increased to a level that is still very low compared to cash flow. This increase is therefore to be viewed positively. The company has acted somewhat too defensively so far and has not optimally utilized its capital strength. A small dividend of 20% to 30% of profit, or about 0.5% of market value, would be nice and would round out the picture.
Valuation
Contrary to intuition, particularly cheap companies are often not a good investment. On the contrary, the best companies for investors are found in the higher valuations. This is because the market usually values these companies so highly for good reason.
In the range of higher valuations, there are of course also companies that are too expensive. With an average P/E ratio of 60, however, Lululemon is in exactly the optimal valuation zone and is neither too expensive nor too cheap. For other criteria as well, such as the price-to-book or price-to-cash flow ratio, the valuation is solid or even tends to be somewhat too cheap.
All in all, Lululemon is a recommendable company from a fundamental perspective. It is rated very highly by our algorithm. Further details on the valuation can be found in the detailed view on Leeway. In our commentary we have presented a current trading setup.
