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Not So Fancy About Lululemon Athletica inc. (LULU)

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Lululemon Athletica inc. (NASDAQ:LULU)Lululemon Athletica inc. (NASDAQ:LULU) experienced a huge price decline of more than 17.5% – to more than $67.80 per share – in only one trading day. The significant drop in its stock price was due to the news that CEO Christine Day would be leaving the company after five and a half years working for Lululemon. Christine Day will still lead the company during the time that Lululemon Athletica inc. (NASDAQ:LULU) searches for its new CEO. Should investors be bearish about the unexpected resignation of Day?

Slow growth in first-quarter earnings

In the first quarter 2013, Lululemon Athletica inc. (NASDAQ:LULU) experienced year-over-year growth in both its top line and bottom line. Revenue increased from $285.7 million in the first quarter last year to $345.8 million this year while the net income increased by nearly 1.4% to $47.28 million. The low growth in its net income was due to a much higher cost of goods sold and sales, general and administrative expenses. The gross profit margin came in at 49.4%, much lower than the gross profit margin of 55% in the first quarter 2012. The lower gross margin was attributable to a $17.5 million for inventories provision relating to a pants recall. On the constant-dollar basis, its same-store sales growth was around 7%.

Expensively valued

What I like about Lululemon Athletica inc. (NASDAQ:LULU) is its conservative capital structure. As of May 2013, it had $930 million in equity, $588.4 million in cash and no debt. The biggest item in its liabilities was accrued liabilities, booked at more than $38 million in May 2012. Looking forward, Lululemon expected to generate around $1.64 to $1.66 billion in revenue, with the diluted EPS staying in the range of $1.96 to $2.01 for the full year 2013.

Lululemon Athletica inc. (NASDAQ:LULU) has made moves to expand its footprint internationally. It has recently opened two showrooms in London, and one in Germany and in Singapore. Indeed, Lululemon has a lot of room to expand its business overseas. The market potential is huge, the success will depend a lot on its execution.The market seems to value Lululemon quite expensively, at as high as 22.8 times forward EV/EBITDA.

EV/EBITDA represents Enterprise Value/Earnings Before Interest, Taxes, Depreciation and Amortization. This ratio adjusts the cash and debt position in the company’s market value, and then compares it with the cash flow position of the company. The lower the ratio, the cheaper the stock.

A lot of excitement for Under Armour, but it is also expensive

Compared to its peers, including Under Armour Inc (NYSE:UA) and The Gap Inc. (NYSE:GPS), Lululemon Athletica inc. (NASDAQ:LULU) is the most expensively valued. Under Armour also has a high EV multiple. At $59.60 per share, Under Armour is worth nearly $6.3 billion on the market. The market values Under Armour Inc (NYSE:UA) a bit cheaper than Lululemon, at 19 times its forward EBITDA. Investors might be excited with the bright 2013 outlook of Under Armour. Recently, the company raised its full year outlook after reporting impressive first-quarter earnings results. The revenue was expected to come in at around $2.21 to $2.23 billion while the operating income would stay in the range of $256 million to $258 million, year-over-year growth of 23%-24%. It set the goal to generate $4 billion in revenue and $480 million in operating income by 2016, driven by the transformation of technology and design, category expansion and platform innovation.

Under Armour Inc (NYSE:UA) plans for its huge growth in overseas market. It intends to increase the percentage of revenue from international markets from 6% in 2013 to 12% in 2016. Within the next two years, it will open subsidiaries in different parts of the world including Mexico, Chile, Brazil and Australia.

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