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Earnings Analysis: Lululemon Athletica Inc. (NASDAQ:LULU)

Lululemon Athletica inc. (NASDAQ:LULU) recently reported its preliminary financial results based on which CapitalCube provides a unique peer-based analysis of the company. Our analysis is based on the company’s performance over the last twelve months (unless stated otherwise). For a more detailed analysis of this company (and over 40,000 other global equities) please visit

Lululemon Athletica inc. (NASDAQ:LULU)

Lululemon Athletica inc.’s analysis versus peers uses the following peer-set: Nike Inc (NYSE:NKE), adidas AG (PINK:ADDYY), Yue Yuen Industrial (Holdings) Ltd. (551-HK), PUMA SE (ETR:PUM), Anta Sports Products Ltd. (2020-HK), Amer Sports Corp (PINK:AGPDY), Billabong International Ltd. (ASX:BBG) and Li Ning Co. Ltd.(2331-HK). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Quarterly (USD million) 2012-07-31 2012-04-30 2012-01-31 2011-10-31 2011-07-31
Revenues 282.6 285.7 371.5 230.2 212.3
Revenue Growth % (1.1) (23.1) 61.4 8.4 13.7
Net Income 57.7 46.6 73.5 38.8 38.4
Net Income Growth % 23.7 (36.6) 89.5 1.1 15.0
Net Margin % 20.4 16.3 19.8 16.9 18.1
ROE % (Annualized) 33.1 29.4 52.2 30.4 32.4
ROA % (Annualized) 28.9 24.8 42.9 25.8 28.0

Valuation Drivers

lululemon athletica inc. currently trades at a higher Price/Book ratio (15.2) than its peer median (8.3). Lululemon Athletica inc. (NASDAQ:LULU) achieved a better operating performance than the median of its chosen peers (ROE of 35.5% compared to the peer median ROE of 15.3%) and the market still expects faster growth from it than from those peers (PE of 51.5 compared to peer median of 16.4).

The company has a successful operating strategy with above median net profit margins of 18.5% (vs. peer median of 6.9%) and relatively high asset turns of 1.7x (vs. peer median of 1.2x). This suggests that the company has a dominant operating model relative to its peers. Lululemon Athletica inc. (NASDAQ:LULU)’s net margin is its highest relative to the last five years and compares to a low of 11.2% in 2008.

Economic Moat

The company enjoys both better than peer median annual revenue growth of 40.6% and better than peer median earnings growth performance 51.1%. LULU currently converts every 1% of change in annual revenue into 1.3% of change in annual reported earnings. We view this company as a leader among its peers.

Lululemon Athletica inc. (NASDAQ:LULU)’s return on assets is above its peer median both in the current period (31.0% vs. peer median 8.7%) and also over the past five years (27.2% vs. peer median 10.5%). This performance suggests that the company’s relatively high operating returns are sustainable.

The company’s comparatively healthy gross margin of 57.9% versus peer median of 46.5% suggests that it has a differentiated strategy with pricing advantages. Further, LULU’s bottom-line operating performance is better than peer median (pre-tax margins of 27.5% compared to peer median 7.5%) suggesting relatively tight control on operating costs.

Growth & Investment Strategy

Lululemon Athletica inc. (NASDAQ:LULU) has grown its revenues faster than its peers (41.5% vs. 8.1% respectively for the past three years). The market also sees relatively higher long-term growth prospects for the company, giving it a better than peer median PE ratio of 51.5. Overall, we classify the company’s growth prospects as superior relative to its peers.

LULU’s annualized rate of change in capital of 57.2% over the past three years is higher than its peer median of 7.0%. This investment has generated an above peer median return on capital of 35.4% averaged over the same three years. Evidently, the relatively high capital investment was successful given the the relatively strong growth in its returns.

Earnings Quality

Lululemon Athletica inc. (NASDAQ:LULU) has reported relatively strong net income margin for the last twelve months (18.5% vs. peer median of 6.9%). This margin performance combined with relatively high accruals (2.6% vs. peer median of 0.6%) suggests possible conservative accounting and an understatement of its reported net income.

LULU’s accruals over the last twelve months are positive suggesting a buildup of reserves. In addition, the level of accrual is greater than the peer median — which suggests a relatively strong buildup in reserves compared to its peers.

Read the rest of the article at CapitalCube.

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