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Lululemon: Finance for Managers

A recent report indicates that Lululemon had a strong start to the current year before Coronavirus forced its stores in the US and Europe to close in March 2020. The uncertainty about the retail industry, including Lululemon will be carefully watched by investors in the months ahead (Kapner, 2020). The company reopened more than 150 stores worldwide in May 2020, and it planning to open another 200 stores in the coming weeks. The market research indicates that the company’s stock price declined sharply due to the current pandemic crisis. However, it is anticipated that it will go back up as the company showed its growing popularity and rising demand for its products in 2019, followed by the first quarter of 2020. Lululemon’s stock has bullish fundamentals, which make it a stock to buy and hold in the coming months (Shreve, 2020).

It is suggested that an investment in LULU has a moderate level of risk based on the combination of factors, including the effects of the current COVID-19 crisis on the retail sector, and the company’s strong business and financial performance in 2019. The current stock price is at its highest level, and the beta (5Y Monthly) is 0.96 (Yahoo! Finance, 2020). It implies that the company’s shares are following the index trend but the percentage change in its stock price is greater than NASDAQ. It is expected that the company will experience strong sales growth once the global market completely opens up.

The market capitalization of Lululemon is $36.028 billion which is less than that of Nike is $145.785 billion and greater than Columbia Sportswear Company (Columbia) whose market capitalization is $4.577 billion (Yahoo! Finance, 2020). Lululemon’s total revenue and total assets were $3.979 billion and $3.281 billion respectively, in 2019. On the other hand, the total assets of Nike were $23.717 billion, and those of Columbia was $2.931 billion in 2019. Lululemon holds 4.57% of the sports apparel market share, and Nike and Columbia Sportswear Company have a 5.5% and 3.12% market share respectively (CSIMarket, 2020). Therefore, it is indicated that Nike is a much larger firm than Lululemon. Other competitors also include Under Armour and Adidas.

The growth of Lululemon’s business is measured by its revenues and total assets reported in the last three years given in Table 1.

2019 2018 2017
Total Revenue 3,979,296 3,288,319 2,649,181
21.01% 24.13% 13.00%
Total Assets 3,281,354 2,084,711 1,998,483
57.40% 4.31% 20.57%

Table 1. Lulelemon Business Indicators (Yahoo! Finance, 2020).

It is noted from Table 1 that the company’s revenue grew by 21.01% in 2019, 24.13% in 2018, and 13% in 2017. On the other hand, its total assets increased by 57.40% in 2019, 4.31% in 2018, and 20.57% in 2017. It indicates that the company benefited from the increase in the demand for its products, especially its yoga wear.

The profitability of the company is assessed by calculating values of key financial ratios in Table 2.

2019 2018
Operating Profit Margin 22.34% 21.46%
Net Profit Margin 16.22% 14.71%
Return on Assets 19.67% 23.21%
Return on Equity 33.07% 33.46%

Table 2. Profitability Ratios.

It is noted from Table 2 that the company’s profitability improved in 2019 as the values of operating profit margin and net profit margin increased. However, the Return on Assets (ROA) and the Return on Equity (ROE) had lower values in 2019, which was due to the significant investment in new assets by using its internal equity.

The P/E of the company’s stock is 56.13 (Yahoo! Finance, 2020). A high P/E multiple indicates that investors have an optimistic view of its business. The future of the company seems favorable because of its strategy to expand its sales network and achieve higher sales. The profitability of the company was strong in the last two years, and it has a strong cash position that would help it to open up new stores and strengthen its supply chain. The company does not pay dividends to its shareholders and its dividend yield is 0%. The company was founded in 1998, and its stocks symbol is LULU, which is listed on NASDAQ.

Based on the analysis provided above, it is highlighted that the company experienced a sharp increase in its sales and profits in the last few years as it generated growing demand for its high-quality products. It is also observed that investors responded positively to the company’s announcement to reopen its stores, and its stock price is currently trading at its highest level. Therefore, it is recommended to buy the company’s shares for a capital gain in coming periods.

References

CSIMarket. (2020). Lululemon Athletica Inc (LULU). Web.

Kapner, S. (2020). Lululemon says coronavirus curbed sales growth in March. The Wall Street Journal. Web.

Shreve, K. (2020). Is LULU stock a buy right now? Here’s what earnings, Lululemon stock chart show. Investor’s Business Daily. Web.

Yahoo! Finance. (2020). Lululemon Athletica Inc. (LULU). Web.

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