The Fund @ Sprott
Equity Research
Lululemon
Buy, Current: $65.38 , Target: $68.49
November 5, 2012
5-Year Performance
300
250
200
150
100
50
Oct-12
Apr-12
Oct-11
Apr-11
Oct-10
Apr-10
Oct-09
Apr-09
0
Oct-08
yklopt@gmail.com
http://fund.ssb.carleton.ca
$140
$120
$100
$80
$60
$40
$20
$0
Oct-07
Sector Analyst
Price per Share
BCom Candidate 2014
Finance and IS
Apr-08
Yanina Klopotovskaya
Source: Bloomberg
Investment Thesis
No debt, no sweat
The company is indicated itself as a strong performer through rapid growth, superb product
offering and brand loyalty. The stock has boosted significantly since IPO and the company
still operates with no debt. The excessive cash holding is allowing the company to support
their growth strategy
Q2 beats estimates, Promising outlook
Robust top line growth from the Q2 2012, significant comparable-store sales increase and
surge of EPS. Company’ strategic initiatives with the recent e-commerce launch will also
boost both top and bottom line. Compare to its competitors, Lululemon has more growth
catalysts.
Valuation looks chic
Lululemon Athletica currently trades at a significant premium compare to its peer. With eh
main competitor Nike and Under Armour, Lululemon is substation in forward P/E, P/B and
attractive PEG. Lululemon being fairly new in the market, already generates highest sales
per square feet. The company’s premium warrants a long-term earnings growth above the
industry average.
More optimistic consumers
Improvement in consumer sentiment, disposable income and unemployment rate which
directly benefits revenue growth. Lululemon mainly targets high-end customers who
possess the highest purchasing power throughout the recession (if a double-dip would
occur)
The Fund @ Sprott | Equity Research
Company Overview
With IPO in 2007, Lululemon Athletic Inc is a designer and retailer of yoga inspired
athletic apparel, accessories and outwear for women and men. Mostly operating in North
America, Lululemon is premium active wear brand with its competitive strength of its
distinct retail experience. The products are mostly sold at company-owned store and new
e-commerce channel.
Over the last 5 years, the revenue has quadrupled from $58.861 to $282.634 Million. In
the second quarter of 2012, net revenue has increased by 33% to $282.6 Million from
$212.3 million in the fiscal 2011 and the average growth of revenue for the past 5 years is
approximately 47.82%. Comparable stores sales rates for the first two quarter of 2012
increased by 20% which is a good signal of sales growth and indicator that revenue is
generated from store productivity. Diluted earnings per share for the last quarter was
$0.39 on net income of $57.2 Million - up from $0.26 of $38.4million of net income last
year.
The Companies future growth strategy include expansion in North American Continent,
increase of customers base through e-commerce, focusing on brand awareness,
introduction of new production and expansion beyond North America.
Figure 1: Revenue by Product Segment
Figure 2: Revenue by Geographic Region
Revenue Decomposition by
Location 2009-2011
120.00%
100.00%
80.00%
60.00%
40.00%
20.00%
0.00%
Others
Canada
USA
2009
2010
2011
Fiscal year
Source: Bloomberg, Student Estimates
Source: Bloomberg, Student Estimates
Macro Drivers
Lululemon is part of consumer discretionary sector of special apparel. Economical
uncertainty has direct effect on consumer discretionary spending and demand for retail
sector. Most of Lululemon products are considered discretionary items for consumers and
consumer spending on such items is affected by general economic conditions. Consumer
outlook of economic conditions, fear of recession, consumer credit availability,
unemployment level, tax rates and cost of consumer credits are the major factors that
affect consumer confidence.
These unfavourable economic conditions may delay and reduce purchase of Lululemon
products, however is slowly recovering for foreseeable future. Through 2011, growth in
the retail sector was slow because of the decreased consumer spending.
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The Fund @ Sprott | Equity Research
Furthermore the company is sensitive to economic cycles and any related fluctuations in
consumer demand. As a whole, the sector is elastics therefore depend on the consumer’s
confidence, CPI and disposable income. Consumer confidence has reached the 5 years
high, currently at 83, has a positive correlation the apparel store sales (figure3). US
employment rate decreased to 8 percent as more jobs are added yet it remains significant
above pre-recession levels and higher than 5 year average. Unemployment has an inverse
relations with store sales, thus the current shift in the unemployment should positively
influence apparel store sales (figure 4). Consumer debt level could be another indicator of
the discretionary spending. By recent trends, the consumer debt is declining, however still
remains high compared to the historical norms (consumer focused on paying off the debt).
Credit availability is another good indicator of consumer spending (correlation of 0.16).
Credit standards capture the movements in credit availability, thus a tightening of the
standards should result in a decline spending, however it has been increasing since late
2010. Overall the credit standards can provide a signal about the other economical
disturbances. Since the apparel industry is directly tied to consumer spending from
economic outlook it is also related to GDP. IMF projected 1.3% GDP growth for
advanced economies and 5.9% for emerging and developing economies. Since US and
Europe accounts for such a large portion of the apparel industry, GDP growth with
projected increase in consumer spending produces an approximate growth of 3.1% for the
apparel manufacturing and distribution companies in 2012.
Following the US Presidential election 2012, the fiscal cliff is scheduled to come into
affect on January 1, 2013 could lead to re-entrance into recession causing unemployment
rate to increase and real GDP to decline during the first half of 2013 and as noted by
financial services US economy might not reach its full potential until 2018 .
Figure 3: Consumer Confidence/Retail Sales
Figure 5: Apparel CPI/Disposible Income
Figure 4: Unemployment/Sales
Figure 6: Credit Availability s Consumer Spending
Page 3
The Fund @ Sprott | Equity Research
Industry Dynamics
The industry operates in two main categories: Branded and Basic. The branded apparel
companies change premium price for their merchandise and focus on creating a perception
of brand value in order to maintain customer loyalty and generate demands for specific
products while wholesales do not have the freedom and pricing power in term of revenue
per unit. There are several factors that affect the retail industry in specific: input costs,
technological trends, gross margin and inventory turnover
Input costs: Cotton price is an important factor for Lululemon and other apparel
companies in the industry. In this industry, cotton accounts for 62% of the cost of goods
sold. In Q2 2011, price of cotton has reached its peak at 225 cents per pound but has been
adjusting, currently trading at 90 cents per pound (60% decrease). The falling price of
cotton should improve gross margins (Gross margins of LLL over the last 5 years)
FY 2007
53.7%
2008
50.7%
Gross margin
2009
2010
49.3%
55.5%
2011
56.9%
Gasoline prices have risen 19% this year can bring an impact for retail companies
transportation costs. For companies such as Lululemon where most of manufacturing is
outside of North American continent, this change should be taken into account.
Employees wages are attributed to be the second highest expense for apparel companies,
therefore any changes to minimum wages should be monitored as these changes affect
gross margins.
E-commerce Trend: E-commerce activities are increasing and are becoming an important
trend in the retail industry. An average shopping is predicted to spend around $1,738
annually by 2016, compared to $1,207 in 2011. All the major key player in the appeal
industry have online shopping available and on average generate 4.6% of their revenue
through e-commerce which has the ability to 20-30% as mobile computing continues to
revolutionize consumer behavior. From 2011, the e-commerce sales went up 17.6%,
therefore it is imperative for the retails to consider technology, web site design and
incentives to encourage people about inline shopping.
Inventory Turnover/Gross margins: Ability to effectively manage inventory along with
attractive product offering and effective brand management is a key success factor within
this industry. Inventory turnover is an important aspect for branded companies because of
the seasonality and style demand. The average inventory for the top 10 brands in the
apparel industry is 3.99 per years.
Figure 7: Gross margin/Inventory Turnover
Figure 8: E-commerce Trends
Page 3
The Fund @ Sprott | Equity Research
Company Specifics
Lululemon does not own nor operates any manufacturing facilities. The fabric used is
manufactured by a limited number of pre-approved suppliers, approximately 45
manufacturers. The manufacturing is allocated in such way that a single manufacturer
doesn’t produce more than 36% of products offered. This mix is appropriate to diversity
the risk of dependency on one supplier. In 2011, approximately 49% of products were
produced in China, 41% in South East Asia and 3% in Canada, reminding in US, Peru,
Israel, Egypt and other countries. The company is planning to support future growth
through manufacturers outside of North America, however if practical, the company is
indenting to continue production in US and Canada as it could ensure quicker respond to
changing trends and increasing demand.
Lululemon apparel is considered one the most fashionable accessory in the retail with its
own cult. The company is relying on the grassroots marketing and has done impressively
well compare to its major competitors that spend large amount on advertising. Compare to
its competitors, Lululemon retains more of its profit from sales and sell their products only
through the corporate owned stores. Over the last few years the company has picked up
growth momentum and is currently working on new ways to expand the business,
Lululemon is expanding its clothing like to men, which now makes up 15% of total sales
and the company has recently launched a dance-apparel line for teenager ivivva athletica.
Growth in these segments along with the expansion overseas should move the stock
higher. Compare to its competitors in the market, Lululemon has more growth catalysts.
Figure 9: Market Share of Main Business Line
Figure 10: LLL vs S&P 500 vs S&P Retail
Blue—LLL
Green—S&P Retail/TSX
Red—S&P500 /TSX
Source: Bloomberg
Source: Bloomberg
Inter brand’s Top 10 Canadian Brands for 2012
The list is based on the companies with the biggest “brand value” or the economic performance of a company that can be attribute to its marketing and branding power. The
larger companies tend to make the list but relatively smaller companies such as Lululemon
can gain presentence through exceptional marketing (figure 7) Current enterprise value is
$9.305 Billion. Lululemon ranks number 7 among the top Canadian brand and the first in
the retail industry which a high brand recognition for the company (Appendix)
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The Fund @ Sprott | Equity Research
Competitive Positioning
The market for athletic apparel is highly competitive Competition is in the industry is
based on the brand image, product quality, innovation style, channel distribution and
price. Lululemon has a market capitalization of 10.201 Billion, Lululemon is still in
growth phases however the company is starting to pick up pace. In 2011, when the company has reached net revenue of $1 Billion, the profits increased by 34% and same store
slates went up by 26%. Lululemon’s direct competitors include UnderArmour, Nike, Adidas and indirect competitors include The Gap, American Apparel and Urban Outfitters.
Lululemon remains the only stand alone company that specifically targets women in the
athletic category.
Figure 9: Chart Displaying Growth Prospects
Under Armour Inc
Under Armour Inc is involved in designing, developing, marketing and distributing
apparel, footwear and accessories for men, women and youth worldwide. The company
has a much broader ranger of products than Lululemon for various sports and weather
conditions. The company mostly operates through whole sales channels which ranges
from retails to leagues and department stores. Under Armour’s market capitalization is
half of Lululemon, however the company has 25,000 retail stores worldwide and is
ranked as the 21st company by highest sales per Square foot of $780/sqft., while
Lululemon Athletica is ranked 4th with an approximately sales of $1800/sqft.
Under Armour remains successful due to its innovative products and current aggressive
move into the footwear business to be competing with the sport performance of Nike. The
company spends over $8 million on advertising and celebrity endorsements. The company
has experience inventory problems when in Q2 2012, the inventory growth outpaced
revenue growth Nike continues to dominant the shoe segment of the sport apparel with its
tech tie-in innovative lines such as Nike + Fuel Band.
Nike
Nike has been in the industry for 48 years and is global leader in marketing and selling of
sport footwear, equipment and accessories. The company sells products through various
means – retail stores, internet and mix of independent distributors in 190 countries around
the world.
Page 6
The Fund @ Sprott | Equity Research
The company mainly focuses on seven
categories: Running, Basketball, and Football, Women/Men’s training, Nike Sportwear and action sports. Beside these main
categories, Nike designs for kids and other
recreational sports. Nike generates over
half of its revenue from footwear sales
following by the equipment and apparel.
The company has experience growth
mainly in North America, China and
Emerging market regions over the last 3 years. (figure 9)
Adidas
Adidas Group is multinational corporation, present in the industry for as long as Nike is
the largest sportwear manufacturer in Europe and second biggest in the world. Adidas
Group consists of Reebok sportwear, TaylorMade-Adidas golf and Rockport. The top
three market where Adidas had a substantial growth was North America (15%), Russia/
CIS (26%) and China (23%). Like Nike, Adidas is involved with major international sport
events that that have affect the company’s sales (FIFA world cup(2010), Olympic games
(2012) UEFA (2012)). Currently with the steady gross margin of 47.5% and operating
margin of 7.5-8%, the company is striving to achieve 11% and generate sales of 17 Billion
Euros by 2015. Due to the economic crisis in Europe where Adidas own the most market
share, the performance was slow, since the beginning of this year Adidas is sustaining
positive momentum. Adidas had the highest share price and declared dividend of 1 euro..
Figure 10: Adidas Sales by Region
Figure 9: Nike Sales by Region
Source: Bloomberg
Source: Bloomberg
The company is planning to launch 21 products in Q3 is projecting to moderately increase
its operating working capital of 20.8%, increase capital expenditure to 400-450 million
Euros but further reduced its gross borrowings to maintain net borrowing/EBIDTA ratio
below 2. The EPS can be expected to increase at the rate 10-15% equivalent to 3.52-3.68
Euros.
The GAP
Since Gap’s acquisition of Athleta, the company has been able to extend its position in
women’s sports clothing beyond its Gap Body Division. The company operates under 5
divisions:
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The Fund @ Sprott | Equity Research
Gap North America, Banana Republic North America, Old Navy north America, International and Gap Inc Direct. The most revenue is generated through the Old
Navy division following Gap North America and Banana Republic. Like Lululemon, Athleta which is the 1/3 of Lululemon size is now trying to offer yoga classes and sponsor
local instructors with their products in order to position themselves in the market. Gap’s
yoga upstarts making inroad, and is choosing the same location as Lululemon as it is
opening new stores across US. Yet, there is a major indifferent in companies strategy –
Lululemon competes as a luxury brand while The Gap’s Athleta’s market segment consists mainly of families and young customer. The Gap will not be able to position itself in
the same division as Lululemon as the company is bind chain stores and already established image.
Competitors
Stores
Lululemon
UnderArmour
189
25,000 retail stores
American Apperal
Adidas
The Gap
Urban Outfitters
Nike
Industry Average
273
2401 (597 Reebok)
3248
142
338
Figure 11: Comparative Revenue Growth
Inventory
turnover
4.85
2.85
Sales/sq ft
Quick Ratio
B
$1800/sqft
$790/sqft
6.01
1.84
1.11
1.18
1.46
2.98
5.51
5.41
4.31
4.27
n/a
n/a
$335
$575
$1880
$400
0.31
0.8
0.94
1.38
1.77
1.14
1.33
0.9
1.06
1.06
1.16
1.11
Figure 12: Comparative P/E
For more comparative analysis of competitors— Net Sales, ROE, D/E, PEG, EPS and
Profit Margin (appendix figure 2)
Page 6
The Fund @ Sprott | Equity Research
Financial Statement Analysis
Income Statement
Since 2009, the revenue has doubled and the company reached 1 Billion in Revenue in
2011. A significant amount of revenue was recognized in the 4th quarter due to the
increasing sales during the holiday season. In fiscal 2009, 2010, 2011, the company
has recognized 39%, 36%, 37% respectively of full year gross profit in the last quarter.
With the improvements of consumer confidence and spending, the fourth quarter
gross profits are expected to be as high or even higher than previous year. The
working capital will also be affect by the seasonality of the business. The inventory,
accounts payable, accrued expense are expected to be higher as the company is
preparing for the holiday selling season. Since Lululemon products are primarily sold
though corporate owned stores, there are no backlog. The company has also
experiencing an increase in the e-commerce revenue which was launched in 2009,
currently makes up 12.5 % of the revenue. During the 4th quarter, the EPS can be expected to
increase as it has almost doubled during the 4th quarter for the past 2 fiscal years.
Historical EPS in quarters
Fiscal 2011
th
rd
nd
Fiscal 2010
st
th
rd
4 quarter
3 quarter
2 quarter
1 quarter
4 quarter
3 quarter
2nd quarter
1st quarter
$0.51
$0.27
$0.26
$0.23
$0.38
$0.18
$0.15
$0.14
Figure 11: Income Statement Forecast
2009
453
2010
2011
2012E
1,420
2013E
1,820
2014E
2,227
2015E
2,800
2016E
3,330
CV
3,700
28.92%
30.09%
35.67%
37.27%
44.32%
39.81%
38.59%
122
185
286
480
616
1,018
925
992
12.87%
17.17%
18.47%
20.11%
26.37%
27.68%
36.35%
27.77%
26.82%
$0.41
$0.86
$1.29
$1.98
$3.32
$4.24
$6.97
$6.30
$6.73
Source: Bloomberg,
Student
Estimates
712
1,001
Total Revenue
Operating Margin
19.14%
25.75%
Net Income
58
Profit Margin
EPS
Balance Sheet
The primary source of liquidity for the company is the cash and cash equivalents. As of second
quarter 2012, the company is holding $444.3 million in cash and cash equivalent, roughly
1.5 times more compared to same period of time of last year, which amounted $264.7.
Overall the company has been avoiding significant levels cash and carries no debt. Even
though cash increase can be viewed as risk aversion, it should not hinder stores’ growth and
in fact the excess cash of Lululemon Canada can be reserved for any unexpected costs.
With the cash available on hand available the company could focus on priming future
locations, brand awareness initiatives, improvement of distribution system and employee
training . Following cash and cash equivalents which make up the majority of current
assets, PPE is accounted for 22% of assets and has doubled from FY 2011. The company
opened 15 stores this year throughout this year (15 more is planned). The company mostly
consists of equity , the current liabilities include accrued liability, compensation and
income tax payable.
Figure 12: Balance Sheet Forecast
Current Assets
Current Liabilities
Pension Liabilities
2009
216
2010
389
2011
527
2012E
783
2013E
1,266
2014E
1,905
2015E
2,939
2016E
3,903
CV
4,964
48
67
81
105
145
200
263
343
435
0
0
0
0
0
0
0
0
0
Long-Term Debt
0
Total Equity
233
0
0
0
0
0
0
0
0
390
601
916
1,465
2,206
3,356
4,524
Page 7
5,756
Source: Bloomberg, Student Estimates
The Fund @ Sprott | Equity Research
Cash Flow Statement
The company is generating most of its Cash flow from Operating Cash Flows. Most of
operating activities account for inventory (14% of total assets), employee salary (2861
employees) and raw material and shipping. Since the company does not own any of the
store it operates under lease. This approach lets the company to minimize its capital
investments, The lease accounts for 15% of cost of goods sold and based on the current
rate is estimated to be $118.6Million through 2014.
Company specific marco economical risk to cash flows is currency fluctuation.Because of
significant portion of Lululemon sales generate in Canada, fluctuations in foreign currency
exchange has a negative effect in operations. When Canadian dollar weakens against the
U.S dollar, it would cause a negative impact on the Canadian operating results. In FY
2011, the exchange rate has increase therefore benefitted the company. A 10%
depreciation in relative value of the Canadian dollar would result in approximately $15.4
million loss in income from operations and same depreciation in the Australia dollar can
result in $0.4 Million loss. Historically, Lululemon has not engaged in any hedging
activities therefore no future hedging activities are foreseeable to mitigate the foreign
exchange risks.
Figure 13: Cash Flow Forecast
Cash from Operations
Cash from Investing
Cash from Financing
Net Change in Cash
Ending Cash Balance
2009
2010
2011
118
180
194
-16
-43
-112
-3
14
15
103
157
93
Source: Bloomberg,
160
316Student Estimates
409
2012E
282
-90
14
208
617
2013E
521
-120
18
421
1,038
2014E
673
-140
22
557
1,595
2015E
1,090
-190
26
928
2,523
2016E
993
-220
30
805
3,328
CV
1,098
-250
35
885
4,213
Valuation
Discounted Cash Flow
The company is expected to continue to grow by expanding its stores through North America
and Australia. Capital expenditure for 2012 is expected to range between 85-90 million,
including $30 million for approximately 37 stores and the remaining distributed to store
renovations, information technology enhancement and other corporate activities. The
company have not paid any dividends and has stated that it doesn not intend to announce
dividends for the foreseeable future. Most of the cash will still be retained for operations and
expansion of the business. Since IPO, Lululemon stock is up 568 percent while Nike is 92%
and Under Armour us 44%., therefore the company is certainly in the growth stage.
Figure 14: DCF Calculation
Net Income
Add: Depreciation Expense
Add: Net Debt Issued
Less: Capital Expenditures
Less: Change in Non-Cash WC
2012E
286
35
0
-90
-48
2013E
480
51
0
-120
-22
2014E
616
70
0
-140
-27
2015E
1,018
100
0
-190
-44
2016E
925
128
0
-220
-78
CV
992
170
0
-250
-85
FCFE per Year
FCFE Discounted
182
0
389
347
519
412
884
626
755
476
828
7,750
PV - Future Cash Flows
Base Year Cash
Shares Outstanding
9,611
617
144
DCF Value Per Share
$71.08
Assump-
WACC
11.53%
Ke
12.20%
Page 8
Kd
0.66%
CV Growth
4.50%
The Fund @ Sprott | Equity Research
Investment Recommendation
Buy, Price Target $68.49
Investment Positives
— For the consecutive two years, the US apparel industry experienced revenue growth
and is projected to growth at 3.2% through 2016)
— Improvement in consumer sentiment, disposable income, and unemployment will lead
to more discretionary spending
— Highest sales per square foot not only among competitors but in the industry-4.5 times
more efficient that the industry average and ranked 4 th among US top retails per square
foot
— Since IPO, the stock has boosted significantly compare to competitors
— New development of direct to consumer sales channel – addition of e-commerce
customers supplementing store base growth
— No debt issued by the company – low risk of default
— Expanding line beyond women’s yoga apparel and targeting a larger segment
Strong credibility and authenticity of the brand
— The cost of cotton- primary raw material of the apparel is decreasing thus increasing
companies gross margins
— Placed as a luxury good within the industry therefore more likely to remain stable
during the recession and posses highest purchase power
Investment Negatives
— Ability to successfully maintain the brand value and reputation
— Economic downturn - industry will mostly affect consumer discretionary spending and
demand for the products
— Inability to accurately forecast customer demand and maintain inventory
— Limited control over third party suppliers
— New competitors
Overall, I feel that the positives of investing right now outweigh the negatives of investing and
that is why my final recommending is a Buy. The company has shown great ability to grow
and strongly positioned itself in the market.
Disclaimer
This report was written by a student currently enrolled in a program at the Sprott School of Business. The purpose of this report is to demonstrate
the investment analysis skills of Sprott students. The analyst is not a registered investment advisor, broker or an officially licensed financial professional. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any securities. This report is written
solely for the consideration of this student managed investment fund and should not be used by individuals to make personal investment decisions.
Unless otherwise noted, facts and figures included in this report are from publicly available sources. We cannot guarantee that the information in
this report is 100 percent accurate, although we believe it to be from reliable sources. Information contained in this report is only believed to be
accurate as of the day it was published, and it is subject to change without notice. It cannot be guaranteed that the faculty or students do not have an
investment position in the securities mentioned in this report.
Page 11
The Fund @ Sprott | Equity Research
Appendix A
Pro-forma Financial Statements
Figure A1: Income Statement
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The Fund @ Sprott | Equity Research
Figure A2: Common Size Income Statement
Page 13
The Fund @ Sprott | Equity Research
Figure A3: Balance Sheet
Lululemon Athletica Inc
Balance Sheet - USD Millions
200
9
201
0
20
11
2012
E
2013
E
2014
E
2015
E
2016
E
CV
160
316
409
617
1,01
3
1,53
1
2,38
1
3,16
1
4,02
3
8
9
5
9
9
13
17
24
30
44
5
0
0
58
6
0
0
104
8
0
0
147
10
0
0
216
389
527
783
230
14
0
0
1,26
6
340
21
0
0
1,90
5
514
28
0
0
2,93
9
680
38
0
0
3,90
3
865
47
0
0
4,96
4
Property, Plant and Equipment (Net)
62
71
163
217
300
420
590
775
999
Goodwill and Intagible
Defered income taxes
Other non-current assets
8
15
6
0
27
8
4
0
32
9
4
0
307
499
735
39
9
5
0
1,05
3
56
15
5
0
1,64
2
79
22
5
0
2,43
1
104
30
5
0
3,66
8
135
40
5
0
4,85
7
160
50
5
0
6,17
8
Accounts Payable
12
7
15
20
35
55
83
110
140
Accrued Liabilities
Current Portion of Long-Term Debt
Accrued compensation and related expenses
Income Tax Payble
18
0
11
8
25
0
17
18
35
0
23
9
45
0
29
11
60
0
35
15
82
0
41
22
104
0
48
28
142
0
54
37
184
0
61
50
Current Liabilities
48
67
81
105
145
200
263
343
435
Long-Term Debt
Pension & Post-Retire. Benefits
Unredeemed gift card liability
Other non-current assets
0
0
11
14
0
0
18
15
0
0
23
25
0
0
27
30
0
0
31
35
0
0
35
39
0
0
39
44
0
0
43
49
0
0
45
54
Total Liabilities
73
100
128
162
211
274
345
435
533
Equity:
Common Stock
1
1
1
1
68
190
374
653
1
1,12
8
1
1,73
8
1
2,75
0
1
3,66
9
159
180
206
240
307
425
550
777
1
4,65
6
1,00
0
6
20
22
22
233
390
601
916
30
1,46
5
42
2,20
6
55
3,35
6
77
100
4,52 5,75
4 14 6
Page
0
4
5
306
495
735
5
1,08
3
5
1,68
1
5
2,48
5
5
3,70
6
5
4,96
3
Assets:
Cash and Equivalents
Accounts Receivable (avr of 4 yrs = 1.775% of TA)
Inventories
Prepaid expenses and other Current Assets
Other Current Assets
0
Current Assets
0
Total Assets
Liabilities:
Retained Earnings
Additiona paid-in capital
Accum. Other comprehensive income
Total Equity
Non-Controlling Interest
Total Liabilities and Equity
5
6,29
4
The Fund @ Sprott | Equity Research
Figure A4: Common Size Balance Sheet
Lululemon Athletica Inc
Common Size Balance Sheet
2009
2010
2011
2012
E
2013E
2014E
2015
E
2016
E
CV
52%
3%
14%
1%
0%
0%
63%
2%
12%
1%
0%
0%
56%
1%
14%
1%
0%
0%
59%
1%
14%
1%
0%
0%
62%
1%
14%
1%
0%
0%
63%
1%
14%
1%
0%
0%
65%
0%
14%
1%
0%
0%
65%
0%
14%
1%
0%
0%
65%
0%
14%
1%
0%
0%
Current Assets
70%
78%
72%
74%
77%
78%
80%
80%
80%
Property, Plant and Equipment (Net)
Goodwill and Intagible
Defered income taxes
Other non-current assets
20%
3%
5%
2%
0%
22%
4%
1%
1%
0%
21%
4%
1%
0%
0%
18%
3%
1%
0%
0%
17%
3%
1%
0%
0%
16%
3%
1%
0%
0%
16%
3%
1%
0%
0%
16%
3%
1%
0%
0%
100%
14%
5%
2%
1%
0%
100
%
100%
100%
100%
100%
100%
100%
100%
4%
6%
0%
3%
3%
1%
5%
0%
3%
4%
2%
5%
0%
3%
1%
2%
4%
0%
3%
1%
2%
4%
0%
2%
1%
2%
3%
0%
2%
1%
2%
3%
0%
1%
1%
2%
3%
0%
1%
1%
2%
3%
0%
1%
1%
16%
13%
11%
10%
9%
8%
7%
7%
7%
0%
0%
4%
4%
0%
0%
4%
3%
0%
0%
3%
3%
0%
0%
3%
3%
0%
0%
2%
2%
0%
0%
1%
2%
0%
0%
1%
1%
0%
0%
1%
1%
0%
0%
1%
1%
Total Liabilities
24%
20%
17%
15%
13%
11%
9%
9%
9%
Equity:
Common Stock
Retained Earnings
Additiona paid-in capital
Accum. Other comprehensive income
0%
22%
52%
2%
0%
38%
36%
4%
0%
51%
28%
3%
0%
62%
23%
2%
0%
69%
19%
2%
0%
71%
17%
2%
0%
75%
15%
1%
0%
76%
16%
2%
0%
75%
16%
2%
Total Equity
76%
78%
82%
87%
89%
91%
91%
93%
93%
0%
1%
1%
0%
0%
0%
0%
0%
0%
100%
99%
100%
103%
102%
102%
101%
102%
Page 15
102%
Assets:
Cash and Equivalents
Accounts Receivable (avr of 4 yrs = 1.775% of TA)
Inventories
Prepaid expenses and other Current Assets
Other Current Assets
0
0
Total Assets
Liabilities:
Accounts Payable
Accrued Liabilities
Current Portion of Long-Term Debt
Accrued compensation and related expenses
Income Tax Payble
Current Liabilities
Long-Term Debt
Pension & Post-Retire. Benefits
Unredeemed gift card liability
Other non-current assets
Non-Controlling Interest
Total Liabilities and Equity
The Fund @ Sprott | Equity Research
Figure A5: Cash Flow Statement
Lululemon Athletica Inc
Cash Flow Statement - USD Millions
200
9
201
0
201
1
2012
E
2013
E
2014
E
2015
E
2016
E
CV
58
122
185
286
480
616
1,018
925
992
21
0
-31
6
0
-2
0
25
0
-24
7
2
-1
-2
30
12
-14
10
0
-2
0
35
61
49
12
0
-2
0
51
108
46
14
0
-2
0
70
174
66
16
0
-2
0
100
296
122
18
0
-2
0
128
399
103
20
0
-2
0
170
507
108
22
0
-2
0
118
180
194
281
497
634
1,012
968
1,074
-15
-1
0
-30
0
-12
-90
0
0
-120
0
0
-140
0
0
-190
0
0
-220
0
0
-250
0
0
-16
-43
107
0
-6
112
-90
-120
-140
-190
-220
-250
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1
-4
-3
0
0
0
6
8
14
0
0
0
10
6
15
0
0
-6
14
6
14
0
0
-6
18
6
18
0
0
-6
22
6
22
0
0
-6
26
6
26
0
0
-6
30
6
30
0
0
-6
35
6
35
4
103
6
157
-4
93
2
207
2
396
2
518
2
850
2
780
2
862
57
160
316
409
617
1,013
1,531
2,381
3,161
160
316
409
617
1,013
1,531
2,381
3,161
4,023
Cash From Operating Activities
Net Income
Add (Deduct) Non-Cash Items:
Add: Depreciation Expense
Non Cash or Debt Working Capital
Change in Non Cash Working Capital
Stock based compensation
Provision of Impairment and Lease exit costs
Derecogmition of unredeemed gift cards liability
Gain on investment
Cash From Operations
Cash From Investing Activities
Purchase of propterty and equipment
Investment in and advances to franchise
Acquistion of franchises
Cash From Investing
Cash From Financing Activities
Additions of Long-Term Debt
Reductions of Long-Term Debt
Additions of Short-Term Debt
Reductions of Short-Term Debt
Net Debt Additions (Reductions)
Issuance of Common Shares
Redemption of Common Shares
Cash Dividends Paid
Proceeds from exercise of stock options
Excess tax benefit from stock based compensation
Cash From Financing
Foreign Exchange Rate Gain (Loss)
Net Change in Cash
Cash Balance, Beginning
Cash Balance, Ending
Page 16
The Fund @ Sprott | Equity Research
Appendix B
Valuation Charts and Sensitivity
Figure B1: Profitability Forecast
Figure B2: CAPEX and Financing
Source: Bloomberg, Student Estimates
Source: Bloomberg, Student Estimates
Figure B3: Dividend Sustainability
Figure B4: DCF Value Breakdown
Source: Bloomberg, Student Estimates
Source: Bloomberg, Student Estimates
Page 17
The Fund @ Sprott | Equity Research
Figure B5: DCF Sensitivities
CV Profit Margin
Cost of Equity
27%
27%
27%
27%
27%
10.20%
$82.90
$82.90
$82.90
$82.90
$82.90
11.20%
$70.97
$70.97
$70.97
$70.97
$70.97
12.20%
$62.21
$62.21
$62.21
$62.21
$62.21
13.20%
$55.53
$55.53
$55.53
$55.53
$55.53
14.20%
$50.29
$50.29
$50.29
$50.29
$50.29
CV CAPEX as % of PPE
Cost of Equity
25%
25%
25%
25%
25%
10.20%
$82.90
$82.90
$82.90
$82.90
$82.90
11.20%
$70.97
$70.97
$70.97
$70.97
$70.97
12.20%
$62.21
$62.21
$62.21
$62.21
$62.21
13.20%
$55.53
$55.53
$55.53
$55.53
$55.53
14.20%
$50.29
$50.29
$50.29
$50.29
$50.29
Cost of Equity vs. CV Debt Issuance as % of Total Debt N/A
Page 18
The Fund @ Sprott | Equity Research
Competitors
Net
ROE
Appendix: Market
Competitors
Market
Net
ROE
Cap
Sales
Figure 1: Canadian
Inter
Brand’s Top 10
Cap
Sales
LLL
9.65 B
969.54
35.5%
LLL
9.65 B M 969.54
35.5%
Brand
Brand Value
M
UnderArmour
5.42B
572.62
16.47%
Toronto Dominion
Bank
UnderArmour
5.42B
16.47%
M 572.62$9.69 Billion
M
Reuter
Billion
American Thomson
Ap92.53M
161.43M$9.55-102.30%
American
Ap92.53M
161.43M
-102.30%
parel
Royal Bank of Canada
$7.93 Billion
parel *
Adidas
16.92B
5.20B $6.4515.28%
RIM
Billion
Adidas
*
16.92B
5.20B 29.46%
15.28%
The Gap*
16.04B
3.64B
The Gap*
16.04B
3.64B
29.46%
ScotiaBank 41.25B
Billion
Nike*
6.74B $3.9721.51%
Nike* Tim Horton’s 41.25B
6.74B
21.51%
Billion
Urban Outfitters
5.12B
687.85M$3.4414.94%
Urban Outfitters
5.12B
687.85M 14.94%
Lululemon Athletica
Billion
Industry Average
3.35B Inc. 3.45B $3.245
20.39%
IndustryShopper
Average
3.35B
3.45B$3.18 Billion
20.39%
Drug Mart corp
P/E
P/E
D/E
D/E
PEG
PEG
EPS
EPS
Profit margins
Profit margins
41.33
41.33
0.0
0.0
-
1.50
1.50
55.11%
55.11%
1.07
1.07
48.75%
48.75%
-0.5
-0.5
52.54%
52.54%
5.00
5.00
2.07
2.07
4.69
4.69
1.27
1.27
1.22
1.22
47.40%
47.40%
41.23%
41.23%
43.53%
43.53%
37.63%
37.63%
47.5%
47.5%
Sector
-
Change in Brand Value
53.17
9.53%
1.97
Financial
53.17 Services
9.53% +45%
1.97
Business Services
607.8%
+1%
Financial Services
+28%
607.8%
16.39
30.03% +7%
1.12
Consumer
Electron16.39
30.03%
1.12
16.80
55.69% 1.14
ics
16.80
1.14
55.69% +84%
Financial Services
20.80
3.6%
1.47
20.80
3.6% +30%
1.47
Restaurant 0.0%
25.25
1.24
25.25
0.0%
1.24
Retail
17.67%
8.10% +292%
1.13
17.67% 8.10% -7% 1.13
Retail
Bell
$3.06 Billion
Telecom
+25%
Rogers Communication Inc
$3 Billion
Telecom
+32%
Figure 2: Comparative Analysis
Competitors
Net Sales
ROE
P/E
D/E
PEG
EPS
Profit margins
Lululemon
Market
Cap
9.65 B
969.54M
35.5%
41.33
0.0
1.072
1.50
55.11%
Under Armour
5.42B
572.62M
16.47%
53.17
9.53%
1.97
1.07
48.75%
American Apparel
Adidas *
The Gap*
Nike*
Urban Outfitters
Industry Average
92.53M
16.92B
16.04B
41.25B
5.12B
3.35B
161.43M
5.20B
3.64B
6.74B
687.85M
3.45B
-102.30%
15.28%
29.46%
21.51%
14.94%
20.39%
0.16
16.39
16.80
20.80
25.25
17.67%
607.8%
30.03%
55.69%
3.6%
0.0%
8.10%
0.5206
1.12
1.14
1.47
1.24
1.13
-0.5
5.00
2.07
4.69
1.27
1.22
52.54%
47.40%
41.23%
43.53%
37.63%
47.5%
Page 19