Lululemon Financial Analysis from last 5 years PDF

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LULU financial analysis from 2017 to 2021...

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LULU LEMON FINANCIAL ANALYSIS Tyler Johnson, Grace Michael, Gabriel Atem, Gabriel Tomczyk

Lululemon Athletica is a multinational athletic apparel retailer with operations including the sale of athletic and lifestyle apparel, as well as fitness products. This Vancouver based company is traded on the NASDAQ stock exchange under the ticker symbol LULU, with major competitors including Nike, Adidas, and Under Armor. To distinguish itself from competitors, Lululemon produces high-quality products and utilizes a value-based pricing strategy, such that when you buy a product from Lululemon, you buy into the brand, or as Lululemon calls it, “living the sweat life.”1 Lululemon hired PricewaterhouseCoopers to audit the firm’s financial statements and analyze their response to corporate governance, who discovered Lululemon’s strong internal controls, high ethical standards, and an anonymous hotline for management, stockholders, and the board of directors to report violations. 2 In terms of liquidity, Lululemon shows strong numbers that proves that the company will not have problems in meeting its short-term obligations. LULU current ratio for fiscal years ending January 2017 to 2021 averaged 3.6x. This means that the company is capable to cover its current liabilities (due within one year) compared with its assets three times. Furthermore, looking back at the last five years, LULU current ratio peaked in January 2018 at 4.9 due to its expansion ranging from women’s yoga pants to men’s footwear. Also, Lululemon developed in 2018 a wireless fitness tracker called Luup. LULU current ratio hit its five-year low in January 2021 of 2.4x due to Covid-19. However, A Current Ratio of 2.4 indicates that LULU has no problem at all paying its short-term obligations. Another ratio that shows LULU ability to pay its short-term liabilities is its quick ratio of 1.67 indicating that the company doesn’t have problems meeting obligations with its most liquid assets. 1 2 1

“Lululemon Athletica- About Us.” About Us | Lululemon Athletica, https://info.lululemon.com/about. “Global Code of Business Conduct and Ethics.” Lululemon Athletica Inc., https://investor.lululemon.com/committee-details/global-code-business-conduct-and-ethics.

Understanding Lululemon’s long-term debt is important as it is less likely to change as rapidly as its short-term debt. Lululemon shows that the firm is able to meet its long-term obligations. Overall, for 2021, is that long term debt is about 23% of long-term debt and equity (). The amount of debt the company has increased in 2020 following the purchase of MIRROR (). We can see from the Total Debt Ratio (TDR) that for every $1 in assets, Lululemon has only $0.39 in debt (). This means that they are currently operating with more assets than debt, showing that the company can manage its debt healthily. This positivity continues as they operate well above the benchmark average for the industry by about $0.10 (). This means that their competitors either accumulate more debt or possess less assets. This is even after a decrease in the TDR from their high of the last 5 years of $0.41 in 2020 (). Similarly, this information is echoed with a debt equity ratio that shows for every $1 of equity, there is $0.64 of debt and an equity multiplier ratio that shows us that for every $1 of equity, there is $1.64 of assets (). Lululemon does a relatively good job covering its interest obligations with a times interest earned ratio of 7454 times (). The times interest earned ratio tells us that for every $1 of interest, there is 7454 times that in the firm's earnings before interest and taxes (EBIT). This appears massive in comparison to the industry average because of different company financial infrastructures in relation to interest reporting. This is further proven using the cash coverage ratio, which simply accounts for depreciation in addition to EBIT (EBITD). This shows the impact of depreciation greatly increasing the previous ratio with Lulu Lemon’s ability to generate cash from operations is 9141 times. There is plenty of cash available to meet financial obligations. This is because for every $1 of interest, there is 9141 times that that the firm possesses in EBITD (). Compared to past numbers, both ratios have greatly increased since 2017. Besides Lulu’s successful outlier year in 2018, both have increased steadily ().

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In terms of asset management, Lululemon performs above the benchmark, despite a recent decline. As seen in Exhibit I, although their inventory turnover ratio saw a decrease from 3.83 times (2017) to 2.99 times (2021), the retailer turned over inventory quicker than the industry benchmark of 2.81 times. As noted, in inventory provisions, ending inventory increased from $298 million (2017) to $647 million (2021), partly because provisions for damaged inventory valued $30 million.3 To combat this loss and sell out-of-style inventory, 38 outlets were established as of 1/2020,4 demonstrating efficiency, which will improve their turnover ratio in subsequent years. Similarly, the receivable turnover ratios were stronger than the benchmark, despite the 5-year decline. As depicted in exhibit R, the receivables turnover ratio shrunk from 254.82 (2017) to 70.54 times (2021), with an industry benchmark of 9.54 times. This regression is related to LULU’s 2016 entrance into a $150 million unsecured revolving credit facility, stating that all outstanding accounts receivable must be paid off by 12/2021.5 Thus, future investors must observe this ratio to determine their magnitude of credit collecting efficiency. Likewise, as seen in exhibit F, the fixed asset turnover ratio decreased from 4.73 times to 2.13 times over the last five years, falling below the industry benchmark of 2.87 times. This downward trend is in response to the adoption of FASB’s ASC 842, Leases in 2019, requiring companies to recognize lease assets on the balance sheet, increasing the right-of-use assets to an inefficient level of $619.6 million.6 Thus, Lululemon is strong in their utilization of assets, but ratio values have decreased due to evolving accounting standards. In the coming years, Lululemon should see long-term growth in asset management, despite this short-run decline.

3 Lululemon Athletica Inc. Form 10-K for Fiscal Year Ended January 31, 2021. Lululemon Athletica, Inc., 2021 4 Hanbury, Mary. “Lululemon Makes a Rare Move – Discounting Its Clothing as the Pandemic Squeezes Its Business.” Business Insider, Business Insider, 9 July 2020, https://www.businessinsider.com/lululemon-first-warehouse-sale-since-2017-pandemic-squeezesbusiness-2020-7. 5 Lululemon Athletica Inc. Form 10-K for Fiscal Year Ended January 31, 2018. Lululemon Athletica, Inc., 2018 6 Lululemon Athletica Inc. Form 10-K for Fiscal Year Ended January 31, 2020. Lululemon Athletica, Inc., 2020

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Furthermore, Lululemon’s profitability has outperformed the industry, as seen in the profit margin, and return on assets and equity ratios. Lululemon had substantial increases in these three ratios over the past several years, but in correspondence to their acquisition of MIRROR and the pandemic, there was a downturn in early 2021, as seen in exhibit P. The corporation’s profit margin ratio rose from 12.9% (2017) to 13.4% (2021), with a spike in 2020 of 16.2%, in comparison to the industry benchmark of .99%. This rise in profitability is extraordinary, but profit should not be the sole piece to judge a company due to its ability to be manipulated. Likewise, Lululemon’s ROE rose from 22.3% (2017) to 23% (2021), peaking at 33.5% in 2018, well above the industry average of 2.12%. However, Lululemon’s ROA fell from 18.3% (2017) to 14% (2021), despite its climax of 23.2% (2018). The reason for this disparity between the three ratios is due to the clothing retailer’s 2020 acquisition of MIRROR, “an invisible home gym,” which increased Lululemon’s goodwill and other fixed assets, but lowered profitability.7 In the notes of the 2021 10-K, the company reports that they hope for the “omni guest experience” to enhance sales, as well as generate customer value, which will reinstate high levels of profitability thanks to LULU’s acquisition of MIRROR.8 Despite a dip in profitability in fiscal 2021, Lululemon’s market value reached an all-time high. In consideration of a series of ratios such as price-to-earnings ratio, and book value per share, the company’s recent struggles (as a result of an economic crisis in response to the COVID-19 pandemic) do not suggest any unhealthy trends. Price-to-earnings (PE) ratio is calculated by dividing the price per share of LULU stock by the earnings per share. A higher PE ratio indicates that investors are willing to pay more per share in the present because of the expectations of growth in the future. Lululemon’s PE ratio 7 “How It Works.” MIRROR, https://www.mirror.co/how-it-works?gclid=Cj0KCQjwwYLBhD6ARIsACvT72MyqhXioVTVqvci_JL3Dbmm59srZZLrkPFFp0B96Q6XwgMmMyxefyYaAmQ2EALw_wcB 8 Lululemon Athletica Inc. Form 10-K for Fiscal Year Ended January 31, 2021. Lululemon Athletica, Inc., 2021

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was 30.2353 in fiscal 2017–meaning that investors were willing to pay $30.24 in market price for every dollar in earnings–and increased to 41.6211 by fiscal 2018, a 38% increase. By fiscal 2021, the PE ratio had reached 72.7168, demonstrating a 141% increase in just five years, and nearly doubling the industry benchmark of 36.9817 for fiscal 2021. Lululemon’s continuous increase in PE ratio not only implies an increase in market value, but it implies that consumer confidence is consistently increasing on a year-to-year basis, suggesting that the company’s value will increase moving forward. Furthermore, book value per share (BVPS) is calculated by dividing Lululemon’s book value (Stockholders’ Equity minus preferred stock) by its number of shares outstanding. BVPS is the theoretical value that stockholders would receive if the company was liquidated, therefore as Lululemon’s book value per share increases, the market value increases. The book value per share of Lululemon was 9.9206 in fiscal 2017 and increased by 18% to 11.7434 by the next fiscal year. By fiscal 2021, the book value per share reached 19.6376, a 98% increase over the four years prior, and a value more than double that of the industry benchmark. Lululemon has developed a high market value in recent years for a multitude of reasons. The company continues to impress investors with its strong annual reports on the income statement, balance sheet, and statement of cash flows as a result of their efforts to sell products at a high margin, enter new markets, and expand their product mix. Consequently, as investors continue to buy LULU stock, some of the lead market-valuation ratios have demonstrated significant improvement in recent years and show no signs of slowing down. Overall, Lululemon is a relatively ________ company. While they are strong in ___________, they need to improve with ___________. They are neither strong nor weak, and instead are comfortably in the middle. To continue successes and perhaps move to the top,

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Lululemon needs to increase shareholder wealth. In order to do this, it is recommended that the company ______________.

APPENDIX

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Debt vs Equity Analysis 3.5 3 2.5 2 1.5 1

Dollars ($)

0.5 0 21 0 2

20 20

17 20

18 20

19 20

BE

HM NC

A

RK

(M

os

a Ye nt e ec tR

rs

A

ra ve

ge

)

Year Total Debt Ratio

Debt-equity Ratio

Equity Multiplier

Long-term Debt Ratio

Exhibit I

Exhibit R Exhibit F

Exhibit P

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Balance sheet

8

Income Statement

9

Statement of cash flow

10

Ratios

Industry Benchmark

11...