Lululemon Athletica (NASDAQ: LULU)

By Kunal Jaggi
Sources of Information - Company Financial Reports, Financial Post and smaller dailies found through Google News

Founded by Chip Wilson in Vancouver in 1998 is a yoga-inspired athletic apparel company. In addition to casual and athletic apparel (including clothes for yoga, running, cycling, hiking, rock climbing an dother sports), they also offer yoga-oriented props and accessories such as mats, straps and blocks.

Fundamentals

(Company went public only this July)

1. Number of stores increased from 20 (14 corporate, 6 franchised) in 2004 to 60 (52 corporate and 8 franchised) as of July 31, 2007.

2. Compounded annual revenue growth rate of 91.1% (from $40.6 Million in 2004 to $148.9 Million in 2006).
2006 Q2 revenue increased from $32.5 Million to $58.7 Million in 2007 Q2 (80.5% increase). 6 mths ended July 31 increased from $60.7 Million in 2006 to $103.47 Million in 2007.

3. In 2005 & 2006 end, franchises account for 10% of net revenues, 5.8% for 2007 Q2. Corporate-owned stores net revenue accounted for 81.1% of net revenue for 2006 and 90.5% in 2007 Q2

4. As of 2007 Q2, 82.5% of net revenues from Canada, 16.2% from US, 1.3% from Australia and Japan.

5. Gross profit has increased from $32.5 M in 2006 Q2 to $58.6 M in 2007 Q2 (80.3%).
EBITDA has increased from $3.236 M in 2006 Q2 to $9.769 M in 2007 Q2.
Diluted EPS has increased from 0.03 to 0.07 (133%).
CFO has increased from 8.133 M to 9.589 M. However, if you exclude the “Stock-based compensation” which is treated as a non cash expense, it has decreased from 6.7990 to 6.6210. Current Ratio 1.5229
US $1,400 in sales per square ft compared to US $600 for competitors



Management & Corporate Philosophy

• Staples founder Tom Stemberg (who now runs Highland Capital Partners) invested $20 Million Canadian in the company, along with a $80 Million stake by a Boston based private equity investment company called Advent International. Chip Wilson, the founder, is now the chairman of the board and chief product designer but brought Bob Meers, the former president of Reebok as the CEO.


• The community-as-testing ground approach is still the way the company operates, reaching out to high profile yoga and Pilates instructors, personal trainers and others by offering clothing in exchange for feedback and the publicity their wearing the garments engenders. The company limits its traditional advertising to a monthly ad in Yoga Journal because, as Wilson explained, "We put our marketing dollars into training."
  The company's 1,700 employees all go through a training program that ranges from sorting out the myriad Lululemon styles and fabrics to life skills like goal setting and positive thinking. They also are expected to listen to "The Psychology of Achievement," eight hours of audiotapes by the self-help guru Brian Tracy.
  

Analysts Say

• Tal Woolley of RBC Capital Markets raised target price from $23 to $41 and estimates 22 to 25 new stores in operation by end of year.
  
• Lyn Walther with Wachovia Securities has also been optimistic about LULU’s potential. However, she warns that the market is currently looking at the stock’s long-term growth opportunities and potential earnings and not valuing it on the current earnings. In her opinion, the stock has already priced in current momentum and recommends waiting for a better entry point.


• Analysts polled by Thomson Financial estimate full-year 2007 EPS of 28 cents on $216.2 M sales and 42 cents EPS on $301.2 M in 2008.


• Bloomberg's
  Lululemon forecast profit of 30 cents to 33 cents a share for the year through January. Analysts estimate earnings of 28 cents on average. New shareholders own 27 percent of the company. Lululemon founder Chip Wilson holds 38 percent, and the two Boston- based private equity companies have a third.
  

My take - their products are selling like hot cakes in Canada, with girls shelling out $100 Canadian for a pair of Yoga pants. Their products are considered very trendy as well as comfortable. They certainly have the products and concept, but at this point you need a leap of faith to invest since the U.S clothing market is a different ball game. Waiting until this Christmas to see how they do would be a good idea. I would definately keep an eye on them over the next 2 quarters though.