Lululemon Athletica inc. (LULU): Billionaire Stephen Mandel Was Buying

Lululemon Athletica inc. (NASDAQ:LULU) slumped in March after the apparel company (somewhat humorously) discovered that some of its athletic ware was of unusually low quality, leading to a recall and bad publicity for a company whose stock was thought of as being overvalued due to hype in any case. Billionaire and Tiger Cub Stephen Mandel’s Lone Pine Capital apparently saw this as an opportunity to increase its holdings; a recent 13G filed with the SEC shows the fund with 5.6 million shares, or 5% of the total shares outstanding. At the beginning of January, Lone Pine had owned 4.8 million shares of Lululemon Athletica inc. (NASDAQ:LULU) according to our database of 13F filings (find Mandel’s favorite stocks). The stock has risen 11% so far in April and is now trading about even with where it was before the recall.

Lululemon Athletica inc. (NASDAQ:LULU)’s fiscal year ended in early February; according to the 10-K, revenue rose 37% for the year and this growth rate only slowed a little bit during the fourth quarter, when sales were 31% higher than a year earlier. The company’s reports indicate that about half of this growth came from same-store sales, with about 40 new locations being opened worldwide for the year. 2012 earnings were up 47%, also a very strong figure. We would note that the fiscal year had 1 extra week, but this still represents high growth.

LONE PINE CAPITALOf course, as we’d indicated earlier the stock is valued quite expensively as the market anticipated continued high growth, with a trailing earnings multiple of 38. For the forward fiscal year (ending in early February 2015), Wall Street analysts expect earnings per share to rise to $2.56. That still leaves Lululemon Athletica inc. (NASDAQ:LULU) at a P/E of 27. The most recent data shows that 34% of the float is held short.

Lone Pine had actually been the largest holder of the stock by a considerable margin out of the filers we track in our database of 13F filings, which we use to develop investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds outperform the S&P 500 by 18 percentage points per year). Tiger Consumer Management, managed by fellow Tiger Cub Patrick McCormack, reported the next largest position for Q4, of about 900,000 shares (see McCormack’s stock picks). David Stemerman’s Conatus Capital Management increased the size of its position by 47% between October and December to a total of about 880,000 shares (check out more stocks Conatus was buying); Stemerman is actually a former employee of Mandel’s himself.

Peers for Lululemon Athletica inc. (NASDAQ:LULU) include NIKE, Inc. (NYSE:NKE), Under Armour Inc (NYSE:UA), Gildan Activewear Inc (USA) (NYSE:GIL), and Columbia Sportswear Company (NASDAQ:COLM). Most of these comparable companies (the exception being Under Armour Inc (NYSE:UA)) post trailing earnings multiples in the 20-23 range, which while still aggressive valuations are significant discounts to Lululemon Athletica inc. (NASDAQ:LULU). Of course, the principal driver of this gap is lululemon’s higher growth rates: in its most recent quarter, Nike’s revenue grew only 9% compared to the same period in the previous fiscal year while Columbia Sportswear Company (NASDAQ:COLM) actually experienced a decline in sales (we’d note that Columbia is another popular short target). NIKE, Inc. (NYSE:NKE), however, has been reporting higher net income numbers and could be worth a look. Gildan Activewear Inc (USA) (NYSE:GIL)’s revenue numbers have been quite strong, and analyst expectations imply a forward P/E of only 13. If it hits those targets, then the stock might qualify for “growth at a reasonable price.” That leaves Under Armour, which is quite similar to lululemon in terms of its financials and valuation: the trailing and forward P/Es are 47 and 31, respectively. Revenue numbers in its last quarterly report compared to the fourth quarter of 2011 were about even with what lululemon experienced, and earnings growth was close to 50% as well. 19% of Under Armour’s float is held short.

Under Armour and lululemon seem too dependent on future earnings growth for us to recommend buying- at their present valuation current growth rates would have to continue for several years. Gildan appears to be the most likely value prospect, though even there the company may be a bit speculative as the trailing earnings multiple is not particularly low and any value case is rooted in the business meeting analyst expectations over the next two years.

Disclosure: I own no shares of any stocks mentioned in this article.

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