Lululemon Athletica Inc. (LULU): Is This Yoga Apparel Retailer Exciting Now?

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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.

Can Lululemon (LULU) Keep Performing in 2013?

Business snapshot

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.

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