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Lululemon Financial Analysis from last 5 years
Financial Management (FINA 2201)
Northeastern University
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LULU LEMON
FINANCIAL ANALYSIS
Tyler Johnson, Grace Michael, Gabriel Atem, Gabriel Tomczyk
Lululemon Athletica is a multinational athletic apparel retailer with operations including the sale of athletic and lifestyle apparel, as well as fitness products. This Vancouver based company is traded on the NASDAQ stock exchange under the ticker symbol LULU, with major competitors including Nike, Adidas, and Under Armor. To distinguish itself from competitors, Lululemon produces high-quality products and utilizes a value-based pricing strategy, such that when you buy a product from Lululemon, you buy into the brand, or as Lululemon calls it, “living the sweat life.” 1 Lululemon hired PricewaterhouseCoopers to audit the firm’s financial statements and analyze their response to corporate governance, who discovered Lululemon’s strong internal controls, high ethical standards, and an anonymous hotline for management, stockholders, and the board of directors to report violations. 2 In terms of liquidity, Lululemon shows strong numbers that proves that the company will not have problems in meeting its short-term obligations. LULU current ratio for fiscal years ending January 2017 to 2021 averaged 3. This means that the company is capable to cover its current liabilities (due within one year) compared with its assets three times. Furthermore, looking back at the last five years, LULU current ratio peaked in January 2018 at 4 due to its expansion ranging from women’s yoga pants to men’s footwear. Also, Lululemon developed in 2018 a wireless fitness tracker called Luup. LULU current ratio hit its five-year low in January 2021 of 2 due to Covid-19. However, A Current Ratio of 2 indicates that LULU has no problem at all paying its short-term obligations. Another ratio that shows LULU ability to pay its short-term liabilities is its quick ratio of 1 indicating that the company doesn’t have problems meeting obligations with its most liquid assets.
1 “Lululemon Athletica- About Us.” About Us | Lululemon Athletica , info.lululemon/about. 2 investor.lululemon/committee-details/global-code-business-c“Global Code of Business Conduct and Ethics.” Lululemon Athletica Inc. onduct-and-ethics,.
In terms of asset management, Lululemon performs above the benchmark, despite a recent decline. As seen in Exhibit I, although their inventory turnover ratio saw a decrease from 3 times (2017) to 2 times (2021), the retailer turned over inventory quicker than the industry benchmark of 2 times. As noted, in inventory provisions, ending inventory increased from $298 million (2017) to $647 million (2021), partly because provisions for damaged inventory valued $30 million. 3 To combat this loss and sell out-of-style inventory, 38 outlets were established as of 1/2020, 4 demonstrating efficiency, which will improve their turnover ratio in subsequent years. Similarly, the receivable turnover ratios were stronger than the benchmark, despite the 5-year decline. As depicted in exhibit R, the receivables turnover ratio shrunk from 254 (2017) to 70 times (2021), with an industry benchmark of 9 times. This regression is related to LULU’s 2016 entrance into a $150 million unsecured revolving credit facility, stating that all outstanding accounts receivable must be paid off by 12/2021. 5 Thus, future investors must observe this ratio to determine their magnitude of credit collecting efficiency. Likewise, as seen in exhibit F, the fixed asset turnover ratio decreased from 4 times to 2. times over the last five years, falling below the industry benchmark of 2 times. This downward trend is in response to the adoption of FASB’s ASC 842, Leases in 2019, requiring companies to recognize lease assets on the balance sheet, increasing the right-of-use assets to an inefficient level of $619 million. 6 Thus, Lululemon is strong in their utilization of assets, but ratio values have decreased due to evolving accounting standards. In the coming years, Lululemon should see long-term growth in asset management, despite this short-run decline.
3 4 Hanbury, Mary. “Lululemon Makes a Rare Move – Discounting Its Clothing as the Pandemic Lululemon Athletica Inc. Form 10-K for Fiscal Year Ended January 31, 2021. Lululemon Athletica, Inc., 2021 Squeezes Its Business.” 2020, businessinsider/lululemon-first-warehouse-sale-since-2017-pandemi Business Insider , Business Insider, 9 July c-squeezes-
5 Lululemon Athletica Inc. Form 10-K for Fiscal Year Ended January 31, 2018. business-2020-7. Lululemon Athletica, Inc., 2018 6 Lululemon Athletica Inc. Form 10-K for Fiscal Year Ended January 31, 2020. Lululemon Athletica, Inc., 2020
Furthermore, Lululemon’s profitability has outperformed the industry, as seen in the profit margin, and return on assets and equity ratios. Lululemon had substantial increases in these three ratios over the past several years, but in correspondence to their acquisition of MIRROR and the pandemic, there was a downturn in early 2021, as seen in exhibit P. The corporation’s profit margin ratio rose from 12% (2017) to 13% (2021), with a spike in 2020 of 16%, in comparison to the industry benchmark of .99%. This rise in profitability is extraordinary, but profit should not be the sole piece to judge a company due to its ability to be manipulated. Likewise, Lululemon’s ROE rose from 22% (2017) to 23% (2021), peaking at 33% in 2018, well above the industry average of 2%. However, Lululemon’s ROA fell from 18% (2017) to 14% (2021), despite its climax of 23% (2018). The reason for this disparity between the three ratios is due to the clothing retailer’s 2020 acquisition of MIRROR, “an invisible home gym,” which increased Lululemon’s goodwill and other fixed assets, but lowered profitability. 7 In the notes of the 2021 10-K, the company reports that they hope for the “omni guest experience” to enhance sales, as well as generate customer value, which will reinstate high levels of profitability thanks to LULU’s acquisition of MIRROR. 8 Despite a dip in profitability in fiscal 2021, Lululemon’s market value reached an all-time high. In consideration of a series of ratios such as price-to-earnings ratio, and book value per share, the company’s recent struggles (as a result of an economic crisis in response to the COVID-19 pandemic) do not suggest any unhealthy trends. Price-to-earnings (PE) ratio is calculated by dividing the price per share of LULU stock by the earnings per share. A higher PE ratio indicates that investors are willing to pay more per share in the present because of the expectations of growth in the future. Lululemon’s PE ratio
7 “How It Works.” LBhD6ARIsACvT72MyqhXioVTVqvci_JL3Dbmm59srZZLrkPFFp0B96Q6XwgMmMyxefyYaAmQ2EALw_wcB MIRROR , mirror/how-it-works?gclid=Cj0KCQjwwY- 8 Lululemon Athletica Inc. Form 10-K for Fiscal Year Ended January 31, 2021. Lululemon Athletica, Inc., 2021
Lululemon needs to increase shareholder wealth. In order to do this, it is recommended that the company ______________.
APPENDIX
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Debt vs Equity Analysis
Total Debt Ratio Debt-equity Ratio Equity Multiplier Long-term Debt Ratio
Year
Dollars ($)
Exhibit I Exhibit R Exhibit F Exhibit P
Income Statement
Statement of cash flow
Lululemon Financial Analysis from last 5 years
Course: Financial Management (FINA 2201)
University: Northeastern University
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