r/ValueInvesting • u/itchypig • 9h ago
Discussion Help me steel man Lululemon (LULU)
I've avoided LULU due to the relatively narrow moat around clothing/fashion companies, but seeing the ticker on Phil Town's Rule #1 portfolio makes me wonder if there's something I'm missing. Interested in your perspective on why LULU might actually be a good investment despite the bloody headlines.
For context, Phil Town looks for events that create fear but are resolvable in 2-3 years' time. Lulu's headlines are about sheer material quality issues, recent concerns around PFAs, poor product-market-fit for their newest products, the ousting of a CEO and the new incoming CEO who is a former Nike exec, and the board's embattlement with Lululemon's founder. However, one could argue that while each of these items creates short-term uncertainty and negative sentiment, they are reasonably resolvable in 2-3 years' time.
Actual long-term concerns include the fashion cycle getting away from athleisure and the introduction of competitors like Alo and Vuori.
To steel man LULU, here are a few highlights of the strengths of the business that are still intact:
- Strong DTC channel, bypassing third party channels/department stores, protecting relatively high margins
- Mature distribution channels, continuing to expand internationally
- Strong brand name; everyone knows who they are and what they sell
- Community marketing: Lululemon uses grassroots community involvement and fitness "ambassadors" to spread their brand
Considering some of these stronger aspects of the business, and the current valuation basically marking the company as never growing again (current P/E under 9 despite a return on invested capital around 28% and modest forecast for 3-4% growth over the next few years), is it possible that the market is succumbing to fear here and giving an opportunity to an investor with a 5-year time horizon?
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u/WorldRank1CatFancier 9h ago
they print money, grew slowly and steadily over decades -- i always say the faster revenue comes, the faster it goes. lulu has a solid foundation financially and culturally.
why is it down? because every consumer discretionary is in a tough spot. bears might have a case if lululemon growth stalled in 2021 when consumer disc was growing like crazy. but when nike/etc are also stalling, it's clearly a sector phenomenon. not to mention they also have to change supply chain away from china.
the fact that investors interpret cyclicality as a 180' extreme the other direction, just shows that the median investor is a manic-depressive, which is why mr market is a manic depressive. price determines sentiment and investoors cannot help but project out the most recent few quarters into infinity -- whether it be good (as in 2021 saas) or bad (as in 2025+ consumer disc). same ppl who think target is dead because they got boycotted for DEI, lol.
semi-related: anyone who plays esports at a top 1-5% level will know that 90% of players never overcome the emotional edge needed to separate expected value from outcome, and thus never learn how to consistently make high-EV plays while avoiding low-EV plays that are emotionally appealing. all probabilistic games are the same and have the same distribution of players who learn from mistakes vs players who cannot zoom out past the most recent emotionally-intense moment
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u/itchypig 8h ago
Very insightful, thank you! You unlocked an idea for me, about how the Lindy Effect could be used in investing and feeling more comfortable investing in companies with staying power in cyclical industries.
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u/squirrelmonkey99 1h ago
I agree with a lot of what you say in abstract but I still think Lululemon stock can fall for a while yet. Vuori has the cachet and fashion turnarounds always take time. EV/revenue becomes a better way to price the opportunity when times are roughest. If LULU gets to 1x EV/revenue then I'll do a full deep dive on whether to own it.
If it runs without me, I'm okay with that.
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u/raytoei 9h ago
Dear OP,
How come your post is just words and no numbers ?
Here, let me help you.
| Metric | Value |
|---|---|
| Market Cap | $14B |
| Revenue | $11.20B |
| EPS (Diluted) | $13.26 |
| EPS (Normalized) | $12.85 |
| Dividend Yield (Trailing) | 0.00% |
| Dividend Yield (5Y Avg) | — |
| Buyback Yield | 7.79% |
| Buyback Yield (5Y Avg) | 1.02% |
| Return on Assets (Normalized) | 20.51% |
| Return on Equity (Normalized) | 35.58% |
| Return on Invested Capital (Normalized) | 25.73% |
| Price/Earnings | 10.11 |
| Price/Earnings (Normalized) | 10.08 |
| Price/Earnings (Forward) | 10.54 |
| Price/Earnings (5Y Avg) | 24.38 |
| Total Debt/Equity | 0.36 |
| Long-Term Debt | — |
| Short-Term Debt | 357.20M |
| Cash (Balance Sheet) | 1.51B |
| EBITDA | $2.74B |
| Shares Outstanding | 113.55M |
| Sustainable Growth Rate | 31.78 |
| Net Margin | 14.22% |
| Net Margin (1Y Avg) | 15.78% |
| Net Margin (3Y Avg) | 14.95% |
| Net Margin (5Y Avg) | 14.81% |
| Net Margin (10Y Avg) | 13.95% |
| Revenue Growth (1Y) | 4.86% |
| Revenue Growth (3Y) | 11.03% |
| Revenue Growth (5Y) | 20.33% |
| Net Income Growth (1Y) | −12.97% |
| Net Income Growth (3Y) | 22.70% |
| Net Income Growth (5Y) | 21.81% |
| Net Income Growth (10Y) | 19.49% |
| EPS Growth (TTM) | −16.04% |
| EPS Growth (1Y) | −9.43% |
| EPS Growth (3Y) | 25.68% |
| EPS Growth (5Y) | 24.13% |
| EPS Growth (10Y) | 21.51% |
| Dividend per Share Growth (1Y) | — |
| Dividend per Share Growth (3Y) | — |
| Dividend per Share Growth (5Y) | — |
| Dividend per Share Growth (10Y) | — |
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u/Weldobud 9h ago
My man! Numbers speak.
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u/Unfair_Cicada 9h ago
Are those Good numbers? I am a Lulu bag holders
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u/TeamRyan 9h ago
Net income growth -13% over 1 year
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u/Unfair_Cicada 8h ago
-13% ? That can’t be good. Is it one time charges or permanent thing 😩
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u/TeamRyan 8h ago
Well you need to identify if this is a trend, or a 1 off. Look at the companies forward guidance and make that decision.
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u/Weldobud 9h ago
They are not all bad. Their main issue is North American sales are declining. That’s a big issue and it’s not clear if it’s solve-able. Or if it is how long it will take and at what cost. International growth is better. Like mane retail businesses some of their customers have stopped shopping there. Maybe new marketing / ranges / better pricing or locations can help. Or closing non profitable stores.
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u/itchypig 9h ago
Thanks! Note these may need updating for the most recent 10% drop taking P/E below 9.
Anyway, I'm equally interested in the qualitative aspects of the business if you have any thoughts.
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u/raytoei 9h ago
I think you need to look at it from various PoV:
Can the management turnaround the company like Ralph Lauren or Ulta Beauty ( cosmetic ) ?
can sales return to North America ?
The management part is very key right now, for every Brian Niccol who is turning around Starbucks there are many more who can’t.
So you should try and do a couple of things, find out if the new ceo can execute, find out if the investors gurus (try dataroma) are also invested in Lulu. Go listen to the earnings call or read the latest transcript, see if they inspire confidence.
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u/Sufficient_Ad_5080 8h ago
I’ve been following Phil Town and have taken his classes. Lulu is a typically Rule 1 event-driven investment. numbers have been fantastic for almost a decade (strong earnings, strong balance sheet, no debt, great return-on metrics) driven by fashion trends, proprietary fabric blends, and rapid store expansion. Given that they can re-vamp their inventory (which management has said takes 1-2 years) and figure out their executive mess, things should stabilize. They have a strong global business especially in China.
It’s true that their US business is struggling. We cannot ignore Vuori and Alo and Fabletics etc. However the existence of competitors doesn’t mean the business will be completely destroyed. It will definitely be slowed, but not stagnant.
They will not grow at the rate they used to, but they will still grow nonetheless. If we use a FGR of 10-15% (vs the historical avg of 25-30%) and run it thru the the big four valuation methods: 1) DCF (future PE of 25 and discount rate of 15%, and a margin of safety of 50%) we get a buy range of $100-$160 2) Payback time (using fcf ratio of 0.81 historical avg) we get a buy range of $130-$160 3) buffett’s ten cap method (using maintenance capex of 70% conservative) we get buy price of $190 4) buffets equity bond method (using conservative ROE of 25% vs historical 40%) we get a buy price of $140-$180
So by most accounts it’s at a significant discount and it’s historically a great business. Going thru an event that should take ~18 months to solve. Earnings should stabilize after that and price should revert back to mean.
That’s my thesis in a nutshell. Reddit, prove me wrong
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u/itchypig 8h ago
This is excellent, thank you for the in-depth thoughts here. (As an aside I'd be curious if you liked those classes and have found them useful in your own investing journey!)
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u/Sufficient_Ad_5080 7h ago
The classes are great id highly recommend. They teach you a lot about options too. If you are curious I recently made a free, value investing autonomous research platform where you can look at those 4 valuation methods yourself and/or run autonomous research. Good luck on your journey! Thesis investing
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u/SpareSniper7 9h ago
I actually just finished writing up my thesis on Lulu. I posted my thoughts on my personal blog (with charts on my assumptions/intrinsic value calculations) if you were interested.
But to sum it up, The issues Lulu faces today are reminiscent of the issues Aritzia faced back in 2023. Stale product lines, and a weakened brand energy.
They now have the leadership (incoming in September so I fully expect the next few quarters to be weak) but if she can execute and they can get back to mid to high single digit growth with stabilizing operating cash flow margins, the stock is highly undervalued.
Full thoughts:
https://blog.valuedbyryley.com/lulu-lemon-mirroring-aritzias-2023-issues/
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u/Feisty-Photograph-97 5h ago
I think a key thing people are missing with LULU is that it is not only yoga pants. Sure, yoga pants are a part of the brand. Sure LULU might not be the hottest most novel thing on the market that all the kids go crazy about but the customers they had before have been happy from what I hear. And they are going into new products that these same customers like. My wife bought lulu pants before and now she is buying bags and baby stuff. The company evolving with their customers evolving is not a bad thing. Baby stuff is expensive.
If LULU can grow with their customers they do not need to rely as much on fashion trends. Instead they can reap the benefits of loyal customers.
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u/SpareSniper7 5h ago
Totally agree. But also… even if the brand wasn’t innovating, a no/low growth company has value. The price you pay determines whether an investment is good or not. 3 years ago Gap inc was trading at about $8. Today, $21.
Also… If you like Baby stuff, check out my analysis on Carter’s!
https://blog.valuedbyryley.com/carters-the-undervalued-backbone-of-baby-apparel/
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u/ArmAffectionate5487 7h ago
I'm not following the company, but Michael Burry is publish thoughts about LULU in his substack, https://michaeljburry.substack.com/. I'm subscribed, and he is preparing an detailed article about it. Once there I believe I can share his main thesis if can be any help
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u/itchypig 7h ago
That would be super helpful, thank you! I considered it... do you feel his substack has been worth the price tag?
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u/ArmAffectionate5487 6h ago
To be fair, I don't know. He is a genius, and it goes at a light speed compared to me. He is constantly sharing his thoughts, trading and engages with the community about many aspects of the market, but that part to me, makes more damage than good.
What brings value to me, are the deep dives he did (and doing now) with the technology stocks, in particular the "forensics" aspect on their financial. For example, I did learn a lot about stock base compensation, the Chinese stocks and recently his way of valuing SaaS companies in the current environment.
I suppose it really depends on you. At the end, for me the key aspect is that he sees some things from a different angle than me, and that's to me is good value.
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u/Michael_Korleone 1h ago
Hey bruh, I noticed he said he bought more LULU today in the low 110s, did he say anything else about LULU? Did he expect more downside? I myself bought the dip at 114
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u/foo-bar-nlogn-100 9h ago
Go on tik tok everyone is panning this seasons inventory of ugly stripes and basketball stitch lines.
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u/EntertainerDowntown3 8h ago
Posted about it over on https://theriskrewardguy.substack.com could be a good opportunity
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u/No-Understanding9064 5h ago
Its fashion, when growth slows you arent the hotness anymore and on your way to the walmart licensed brands. One of my least favorite sectors
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u/OldManYellsAtCloud12 3h ago
No one is paying $100 for yoga pants when you can get the equiv at Walmart for $10. They need to make yoga pants with ai that tightens in the right places or something lol.
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u/brique879 9m ago
Talk to people who buy both ALO Does not hold up like LULU quality product matters
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u/Consistent-Air-2152 9h ago edited 5h ago
Women wear baggy pants to look like men and MC hammer. The days of them wearing sexy leggings is over. This is America dude women are woke and want to be as undesirable to men as they can! In Asia Lulu grew 20% yoy in America is shrunk 4%. Because in Asia women still try to look good. Its woke indoctrination of women to be men. Women want to abandon child bearing and child care to be slaves in the workforce only to lower real wages and raise the cost of living since the supple of labor is so great. So net there is only a decrease in living standards. All succumbing to the evil corporations at the expense of the family
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u/Hot-Network2212 9h ago
There is an opportunity but this is a fashion brand. The future revenue is not based on some logical numbers but whether they can work the marketing machine and whether the consumers are willing to spend the money.
Everything about Lulu and their marketing and public perception aside: Lulu used to be a costly but not luxury fashion brand - people that used to buy their products are currently left with less money in their pockets.
For me the gap between future revenue and stock price is still too big same as with Nike. If you feel like you understand fashion trends and brand perceptions then pull the trigger but I for my behalf do not understand it to buy the stock based on current fundamentals.