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Lululemon looks a lot better now than it did a year ago

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March 19, 2014 – Comments (0) | RELATED TICKERS: LULU , NKE , KORS

Almost one year ago to the day, I submitted a blog post that looked at Michael Kors and Lululemon.  At the time, both companies were trading at similar P/E ratios.  Both companies had similar ROA, ROE, profitability metrics, no debt, lots of net cash, etc.  But one metric that stood out at me was the fact that KORS had same store sales in the 20-40% range, while LULU only had same store sales in the high single digits.  I came to the conclusion that of these two retail companies, KORS seemed like the winner.

Well a year later, the story for LULU has changed.  LULU has seen a 30% haircut in share price, even though earnings have continued to grow nicely (the markets really, really hate same-store-sales slip-ups.  I mean, like, really hate them).  As a result, the P/E is currently in the mid-20s.  The "cash-adjusted" P/E is in the low-20s.  

ROA is currently around 30%.  ROE is a touch higher.  If they purged their excess cash and bought back some shares, those values would be even higher.  Or they could get a bit more aggressive with store openings (did I mention they have an ROA of 30%) and grow the bottom line even more quickly.  Or they could maintain a cash pile that represents about 10% of the total market cap.  These situations aren't bad.

Now for a comparison: 

Nike's ROA is about 15%.  It trades at a P/E of 27.  

Over the past 10 years, net income has compounded >12%.  Over the past 3 years EPS have compounded >10%.

Lululemon's ROA is about 30%.  It trades at a P/E of 26.

Over the past 6 years, net income has compounded >40%.  Over the past 3 years EPS have compounded >30%.

Just as a side note, Nike has about $6B in cash + eq.  LULU has an EV of about $6.5B.  I'm just sayin'. 

I don't know if Lululemon is going to continue to grow earnings at 30% (though I strongly doubt it), but this growth story is likely far from done.  Their latest line of clothing, &Go, appears to be doing very well, thus far:

http://business.financialpost.com/2014/03/18/lululemons-go-line-could-turn-investor-sentiment/

Lululemon's recent dip might not be completely finished, but for the long-term investor, the value seems to be pretty good - especially relative to Nike.

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