Purpose
I’m assuming everyone who is reading this knows the business. So we will focus on why the price dropped so much, the pessimistic outlook of the market, and an attempt at valuation.
The Dip
Lululemon lost half its value because of slowed growth in the Americas. The company is still thriving and growing internationally though. Revenue guidance was cut from 12% to 9%. In the U.S, same store sales actually decreased by 3% while internationally they have increased by 20%. Let’s look at the distribution of revenue.
Now an optimist might look here and say the same store sales in the U.S will increase over the next five years because they are making strides in male fashion. Or even suggest that the business in somewhat cyclical because these leggings are so durable they don’t tear and there is no need to replace them. Customers report using them for 5-10 years even1.
Men’s clothes represent 23% of their sales. I didn’t expect it to be this high. And they are increasing at 11% YoY. The company aims to have 3 billion in revenue for men’s clothing by 2026.
Honestly, I can totally believe these numbers. 3 billion is not that far off for two years later.
Valuation
Here is the fun part. Do we buy the dip? Does it present an asymmetric risk reward opportunity?
The good part here is there is no debt. The company has 150 million in excess cash. Now let’s say for the next 5 years, sales in the Americas increase by only 3% YoY (this is like the worst case scenario). And let’s assume in the same time period, sales in China & rest of the world increase at 20% YoY. This seems reasonable.
So how much revenue do we get after 5 years and what is the distribution like? Punching in the numbers we see that international revenue will be around 36% after 5 years and the Americas will make up for the remaining 64%.
So 10B in revenue today — where 8B grows at 3% YoY. and 2B grows at 20% YoY for 5 years. So the Americas will generate 9.1B and the rest of the world gives us 5.2B.
Looking at previous profit margins since 20102:
Typically ranges from 10 to 18%. Now we run 10,000 Monte-Carlo simulations. We choose net margins between the numbers mentioned above. And let’s say our total revenue is between 12 and 16B. And say PE is between 10 and 20. Even though they are doing big buybacks, I am assuming the number of shares stay the same.
But despite this I feel like the company makes amazing products, a cult following, and has massive upside since it hasn’t expanded in India and many other parts of the world. International expansion would be key here. And that’s a market that would take many years to saturate. My estimates are so conservative above so it feels like the company is still overvalued. Realistically, international sales could compound at an even faster rate. But it’s good to be pessimistic and ensure a margin of safety.
Conclusion
I believe around 230 to 240$ we can buy a great business with high margins at a fair price. But at 270$ I don’t feel comfortable. Thank you for reading, please let me know if you have any feedback.