Lululemon Athletica Inc. (NASDAQ:LULU) has been a darling of the stock market since the beginning of 2009. Its share price increased significantly, from around $3 per share in Feb 2009 to more than $74 per share at the end of 2012. However, since the beginning of 2003, the yoga apparel retailer has declined as much as 16% to only $62 per share. The sluggish price performance in 2013 was due to the recent recall of its see-through yoga pants. Should investors avoid Lululemon Athletica Inc. (NASDAQ:LULU) after those issues? Or, does the drop in its price represents an investment opportunity for investors? Let’s find out.
Lululemon Athletica Inc. (NASDAQ:LULU) is a yoga apparel designer and retailer in North America and Australia, operating 211 stores located in Canada, the U.S., Australia and New Zealand. The company has three main business segments: corporate-owned stores, direct to consumers, and other. The majority of its operating profit, $379.7 million, or 79.1% of 2012’s total, were generated from the corporate-owned stores segment while the direct to consumer segment ranked second with nearly $83 million in operating profit. Lululemon Athletica Inc. (NASDAQ:LULU) does not own manufacturing facilities. It outsources the manufacturing to around 50 manufacturers globally, with five manufacturers representing 60% of its total products in 2012. In 2012, the retail experienced a comparable store sales growth of as much as 16% on a constant dollar basis, with about $2,058 annual sales per square foot for comparable stores.
Fast growing business with no leverage
When talking about Lululemon Athletica Inc. (NASDAQ:LULU), investors might think of a fast growing business. That is true. In the past five years, Lululemon Athletica Inc. (NASDAQ:LULU) has growing quite rapidly. Revenue nearly quadrupled from $353 million in 2008 to $1.37 billion in 2012, while the net income shot up from $39 million to $271 million in the same period. Furthermore, the retailer could also be considered a cash cow business. The operating cash flow rose from $46 million to $280 million, whereas the free cash flow advanced from $6 million to $187 million during the past five years. What interests me is that Lululemon Athletica Inc. (NASDAQ:LULU) is a fast growing business without any help of leverage. As of Jan 2013, it had $887 million in total stockholders’ equity, $590 million in cash, and no debt.
The see-through pants issues are estimated to cause the yoga retailer to lose up to $67 million in revenue for fiscal year 2013. The revenue is expected to be around $1.61 billion to $1.64 billion while the diluted EPS would be in the range of $1.95 – $1.99 for the year.