I’m Finally On-Board With LULU

This name is officially in my zone. Expect to hear much more from me on it going forward.

It’s tough for me to find a brand that is as dominant with its core consumer as Lululemon is with the Yoga community. I’ve always admired the brand, but could never quite get over the hump as it relates to valuation. Well, now we’re sitting here with LULU at an Enterprise Value of $707mm. Do I care that 1 year ago it had an EV topping $4bn? No. This is a different world we live in. But I can promise you that there are several other brands out there lacking a key growth driver that are keenly aware that this is being valued for under $1bn.

Some considerations…
The holy grail for any company in the athletic space has always been Women. NO ONE, and I mean NO ONE, has even come close to success. The traditional athletic brands have failed outright. The upscale fashion brands and their ‘Sport’ sub-brands did not catch on. LULU is perhaps the first that resonates with the most important consumer in the apparel market. Women age 20-50 (wide band, I know, but LULU spans multiple age groups). Do you think Nike would want this (not at $4bn, but sub $1bn is a different story)? VF? Adidas? LVMH? Yes, yes, and yes. The list goes on.

I am not saying that a sale is in the works. In fact, I like this name for the simple 2-3 year market share opportunity… But when everyone is sweating it out about near term comps, the Canadian dollar, and store opening costs, I love the fact that regardless of any hiccups, there is huge intrinsic value, and a call option on a strategic buyer realizing it.

It’s fair to say that one of the key concerns at this point is that this has been a hyper-growth retailer that has been comping 30%+, but that is decelerating due to not only the law of large numbers, but also the turn in the Canadian dollar (which represents 75% of sales). The next 2 quarters will be particularly tough in that regard, leading up to the launch of LULU’s e-commerce strategy. This means that the consumer no longer has to drive an hour to get to the store, but can simply go on line, click a few buttons and buy the merchandise.

To be clear, I could care less where the sales come from. As long as they are profitable, and brand-enhancing. Will the store-level economics look less attractive? Will store comps slow? Yep. Absolutely. Maybe I cared about this when LULU was a $4bn market cap name and had massive expectations to live up to. But this name is being valued at $707mm, or 7.5x EBITDA. It is one of the most powerful brands in athletic apparel, has a pristine balance sheet, and can realistically grow both top line and bottom line at 20%+ for 5-years.

I’ll take that all day. This name is officially in my zone. Expect to hear much more from me on it going forward.


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