Lululemon Stock Deep Dive: Is the Growth Story Over?

0:00 Welcome back everyone. So today we're going to be diving into the world of Lululemon, a product that you've probably all seen at some point and probably taken a close look at. But today we're going to be diving into the actual business and the business is not doing as well. As of the latest quarterly report, the stock declined roughly 31% from around $330 down to 225 and that was due to a guidance revision of around 3% to the earnings per share and also to the operating margins in relation to that. So, is that a fair assessment of the market and dropping the stock by 31%. Well, I think it's all to do with the market perception of the future for this business and that's what we're going to be trying to take a look at today. So, we're going to be making a case why this might be an investment or not and really shedding a light on all

0:46 the aspects of the business from its business model to its financials to competitive advantages and risk as well. So, let's start off by just covering the founding story briefly. I think you might have all heard of it. It was founded in 1998 by Chip Wilson in Vancouver, Canada. Now, he was entrepreneurial in the past and started a lot of apparel businesses in the past, which he sold off. And in between this kind of haze of not knowing what to do, he took a yoga class and saw some of the actual attire people were wearing, and it wasn't very flattering. And he wanted something that could shape the backsides of women. He was, yeah, I guess doing one for the boys, but I'm not sure what exactly it was. But he started this business and eventually it's well basically took off in the United States and North America and spread from there. So they had their IPO in 2007 and the capital they collected through from the

1:32 IPO around $320 million was used for a market expansion and around 2007208 the CEO Chip Wilson stepped down and Christine Day took over. Now, I'm not going to cover much about her, but she oversaw a lot of the growth of the business and the early stages in North America. And from there, they decided to start expanding into international markets, specifically English-speaking ones such as Australia, New Zealand, and the UK. And from those early steps, they decided then to expand with confidence into the men's apparel as well as accessories and also taking foray into the Asia-Pacific market, especially China. That's a big market for them because, as we all know, this is the second largest economy in the world. And during their high growth phase between 2019 and 2022 this was during the co era and it was overseen by the current CEO

2:19 Calvin McDonald they went through a very high demand pull forward and as did a lot of companies obviously uh and they also launched their women's line of footwear as well as men's line of footwear later down the line and they had a breakthrough in their men's products where they reached around $1 billion in revenue. Now, that's supposed to be dollars, not pounds. Sorry about that. And they also had the mirror acquisition. It was supposed to be this, you know, kind of hardware software integration where people can exercise with a trainer on the mirror. However, quickly demand soured and people shunned the devices and they eventually took a right down on the acquisition and they decided then to hand over the operations for the mirror to Pelaton. In return, they get to, I guess, sell their apparel

3:05 through Pelaton merchandise store to any of their customers. And Pelaton then benefits from people being referred to them. And so, this brings us to the next era of their road map, which was from 2022 all the way to 2027. This is the 5-year plan from their current CEO, Calvin McDonald, in order to, I guess, reinvigorate growth and keep growth higher for longer. So, what is it? The plan is really to double the revenue by 2027 or the end of 2026. That is to go from around 6 billion all the way to 12.5 billion. They specifically say they want to actually double men's revenue and double digital. So that's their direct to customer sales as well as quadruple international. So they're setting really high expectations for their international market expansion. So

3:51 that's a brief history of a few of the milestones that the business has achieved so far and where we are at right now. And let's take a look at the business model. So what does Lululemon actually provide to their customers? Well, one key thing is premium products. They're looking for performance-driven apparel. Also for some comfort and style and durability. You want some really quality materials, materials that won't, I think we call it pilling. Basically, when they rub together, they're not going to see that little fuzz coming off of them. And people are resonating behind the fact that it's a quality product. And they are definitely targeting those fitness and yoga enthusiasts. I mean, there was even like, I guess, a persona, a person that embodied everything that Lulim stood for. I think they called her ocean girl or something along those lines. Basically, a woman who's single in her 30s who was earning $100,000 or more.

4:37 But now, they're kind of expanding into other areas where they're looking into runners, tennis, and golf enthusiasts. People who are like, you know, just outside of the normal scope of just the yoga enthusiast. And of course, there's a lifestyle branding where people, yes, you know, they're not necessarily working out, but they like the look and feel of the Lululemon, especially the pants and their products, and they just wear them for their day-to-day lives. I can see an argument whereby, you know, we're shifting towards a world where people are, you know, on this Olympic craze, and people are wanting to look good. There's more time at home whereby people just want to wear relaxing clothing as opposed to having a five day, six day work week. Maybe they're working four day work weeks or maybe they're working from home. They want to shift into something nice. They want to be out for 1 hour during their lunch break. Maybe that's a transition that's

5:22 happening and will continue to happen. It's important for us to understand also where the vulnerabilities lie in the business. Who are the key partners and key suppliers? So their key suppliers are people who providing them their fabrics that they're looking for. These are like the polyesters, the nylons, the cotton, all these kind of materials. And you can see here the breakdown where those fabrics are being sourced as well as a few manufacturing partners. So there's no supplier concentration, but they're definitely exposed to the Asian market in terms of production, as are a lot of apparel companies. There are very, very few companies who manufacture in-house. So who are the key partners that Lullein works with? Now, I think it's important that they stay close to their roots. They're obviously still partnering with some yoga studios and fitness centers and gyms. You could say they've partnered with with the Pelaton as well. And they have some key brand ambassadors, one of them being Lewis

6:09 Hamilton. And there are some other content creators that, you know, can reach out to them and work with their affiliate program in order to, I guess, market their products. And they obviously host some community events, you know, they might have, you know, a takeover of some area in, let's say, last time they had one in Regent Street in London. And they've had some workshops all around the world. Whenever they have there's a marathon or something like that, they might have something close by. So in terms of the cost of the business, we're going to just analyze this quickly. The gross margin is affected by two things specifically. The cost of goods sold and the manufacturing. Obviously, that's the fabrics and the cost to manufacture and that's what's affecting the gross margin. And these are really variable costs to a degree. So, you could take a look and see how the mix of fixed cost versus variable costs are in this business. They can always turn down or turn up the supply of their inventory if

6:55 they need to. The other costs that impact their operating margin are going to be their shipping and fulfillment, their marketing costs, their e-commerce costs, their retail and warehouse. So basically these are their actual front-facing stores that they have and their fulfillment centers, you know, warehouses where they store everything and ship that to the customers as they need to. And then they have their fixed corporate and admin cost. So you could say that's selling and and SGNA and basically part of that is going to be the marketing budget that they have allocated. And taking a look at their capex, this is what's going to be affecting their free cash flow. How much are they reinvesting back into the business? They reinvesting back into renovations of their own stores. their retail footprint needs to expand by opening new stores and then the technology investments. So you could think about potentially things like RFID. So you can see in this image that

7:41 I've seen these actually in the Uniqlo stores whereby you just drop your item in there and it scans it automatically. Now could this be some this is not new technology but could it be ubiquitous in all apparel stores? It could be and it's one of those things that they could invest in. Just thought about putting that in there for you. and the distribution network expansion. That's basically more fulfillment centers and it's likely as they expand stores are going to need more investments into that area too. So company analysis what are we looking at here? So we're looking at the channels in which they are selling their products. They are selling their products through their company operated stores. They're selling it through their DTC channel. So that's their digital channels as well as other channels. Now other channels are basically going to be licency agreements with their franchise sellers in other countries whereby they have better logistical operations in order to operate the stores. So they

8:26 partner with them in order to open extra stores in other countries whereby they can't have the operational knowhow to do that. They also have some third-party DTC channels such as Zando which is I guess you could call it like a marketplace that they sell on. It's important to know that they don't generally do this as a you know first option. It's only if there's very limited, you know, ways for them to reach their customers. They might partner with these kind of DTC marketplaces. They don't list any products on Amazon and they don't list their products on Tik Tok shop for example. So you can see that 90% that's basically 10% the other channels that they're using. 90% of that is coming from their actual company operate stores and DTC channel which they have full control of. So you might also be wondering what's the growth in actual channels that they have. Now, obviously

9:14 going back to the early days of the business, company operated store was always going to be a larger piece of the pie back all the way down into 2013 as far as I can get this data for. And you can see that since then they've managed to continuously increase their direct to consumer revenue, their DTC SE channel much faster than their company operated stores. And you can see that the keer or the compounded aloe growth rate in the number of stores that they have is around 11.35% whereby their digital execution is around 30% since then. And that's obviously a great sign whereby we're heading towards a more digital world. They're not ignoring this channel and they're leaning in heavily to it. And now breaking down the revenue by gender. Obviously we see that the women's segment is the largest piece of the pie as I would expect given that it

10:00 started off there. However, the men's segment's growing quite quickly and it's sitting at roughly 25%. With the other segment comprising mostly skincare products that they're, you know, selling in the stores. So, that's a much smaller segment, but it is really quite telling that their men's segment has grown to be 24% overall. You can also see this in this time series data whereby the men's revenue was around 19% to begin with and that expanding all the way to 24%. As far as geographical expansion, they remain focused in the areas of USA and Canada. So basically North America, but the international market is going to be growing quite quickly. You can see that the revenue is starting to show some signs of diversification whereby the North America revenue that is the line in blue is heading downwards. It used to

10:47 be 90% in 2018 and now it's all the way down to 74%. So that's actually a marked reduction and that's great to see so long as obviously it's increasing elsewhere. They're taking market share in the other areas around the world was around 9% in 2018 expanding all the way to 25%. So let's revisit the power of three* 2 strategy that's coming under pressure. Now they've set some lofty goals of doubling their revenue from 2022 of around 6.2 billion all the way to 12.5 billion. That's the chart bar chart that you're seeing in purple. And this is what they've actually achieved so far. Now, obviously, this is year zero, so of course, ignore this. There's a 0% difference between these two values. However, what we're taking a look at is what they've actually done and what they forecasted they need to

11:32 do. Basically, I've filled in the gaps in between this 6.2 figure and this 12.5 figure and compared that to what they actually achieved throughout this period. Now, you can see they've managed 8.1 billion in 2023. That was 8% increase over what they were potentially supposed to achieve. And then you can see a 9.8% increase in 2024. However, in 2025, this is where things are starting to show potentially some cracks where they've only managed a 5% difference in where their trajectory is supposed to take them. Now, they are still above where they need to be, whereby they need to be above 10 billion. They're at 10.5 billion. However, I've not included the quarterly data for 2026 because it wouldn't tell you much unless you look at the last trailing 12-month data.

12:18 However, it's not comparable. So, we have to wait and see what happens in 2026 and to see whether or not they're able to achieve this 11.2 billion figure. Now, this is going to be quite telling because if they are not able to achieve this yearly target of 11.2 billion, that puts their, you know, potential forecasting into question. And we can also take a look at the target specifically. Remember, we talked about the power of three being divided into men's, DTC, and international. So, we're looking at the men's right now. And the men's is actually potentially showing some cracks whereby it was growing at 6% now it's down to 4.8 and then 4.7 still above the actual target though. So not confirmed as below the target they need to re reach which is 3 billion for the men's. Similarly digital or DDC is

13:03 actually doing pretty well as well but a marked reduction and very marked reduction in this one actually. So it's gone from 10.8% down to 2.8%. So almost at the level they need to be but not under. And this is actually now and international. This is where they're actually underwater in terms of where they need to be overall. They're quadruple expansion. That was a very lofty target to set that they wanted to quadruple expansion. It's not to say the business is actually in, you know, peril because they're growing slower than expected. Not at all. Because sometimes growth, and you'll see that growth for growth's sake is never a good reason. And sometimes you need to actually slow down the rate of growth. So, I don't see this completely as a negative, but I just wanted to point out when management says something and they don't execute on it, you have to question that sometimes.

13:50 So, let's look at that global expansion story that they have so far. Now, this is a map of their stores overall and you can see that there's 767 company operated stores as of February 2nd and they have 56, I guess, net new company operated stores. They don't actually break down the franchise stores that they have as well, which are mostly in the Middle East area. But in 2025, they're planning on opening in five new countries, which actually is a very rapid expansion, I would say. And that's going to be through some third party or franchisee licency agreements. They they've also set some longerterm targets where they're looking to expand into India, Indonesia, Philippines, and Vietnam. So basically the South Asia market and India particularly is going to be a booming economy as we'll discuss later on. Now we all know that in

14:37 business it's much better to keep a customer than try to gain a customer. And that's where I think it's important to understand the culture and engagement that they have in Lululemon. So, basically, they have these store educators. Now, frankly, I've never seen one when I walked into one of them, but apparently they're there and they're very highly trained in order to help you throughout your experience. In any case, they also have their loyalty program whereby their customers can also sign up for their free tier membership. And what they get out of that is some of these perks. Basically, partner perks, early access to product drops, exchanges or credit on sale items, and select Pelaton classes, membership events, and free hemming. So, free hemming, I'm not very I'm not sure what hemming is, but taking a look at some of these images. I think this is what it is. Basically, they'll tailor your clothes to fit. And that's actually a very nice perk to have and I

15:23 think a lot of people would appreciate that and I think sets it apart a little bit from your average generic Target-based or Walmart-based leggings that you might get there. And they also have their like new resale. Now they're leaning into this what they call sustainability initiative. Now it sounds very nice to say sustainability, but what might really be is that people are just leaning more into value and they're trying to capture as much of that value as possible. What I mean by that is basically customers are not willing to pay as much as they used to. And it's actually forecasted by the state of fashion business report that you know resale of items it could be worth it. It's around 10% of the global apparel market by 2025. So it's actually not wrong for them to target this. I just wanted to highlight it's not really through sustainability. So what are the innovations that Lululemon do to try to

16:08 keep their customers happy? And you know obviously they have these proprietary fabrics. Proprietary does not mean patented. Now, they've done a very good job of educating their customers on what different materials they have. So, you could argue that some customers come in saying, "Well, oh, I want a Luan or I want a Luxream or I want a Nulu or I want like what products do you have with these fabrics?" And they go look for those types of products. And if there is one hero product that you should know Lululemon for is probably the Align Pant. There's something about these that makes women go crazy for them. So, I'm not sure what it is, but apparently they've been releasing them with a seam, without a seam. And you know, this is the kind of stuff that is viral marketing, and I guess keep people coming back for this. This is a $1 billion revenue product, folks. This is

16:54 not something, you know, that you could easily just gloss over. This is making up roughly around 10% of their revenue. And they have other products like this for the men's, which are hero products or franchise products. They call them the ABC pan. Now, this apparently stands for anti-ball crushing. So, in case anyone was ever interested in what that means, they have other products obviously, but this is just how they're trying to think about their product line. They're thinking about making them all into $1 billion revenue streams. So, as far as industry analysis, so we're going to take a look at some of the secular tailwinds and headwinds in this business and take that into consideration when analyzing Lululemon. So, the good news is the rise of athleisure. Athleisure is the market that Lululemon helped create. They created the actual market and they were the first movers in this area and this

17:40 market is expected to grow at around 9.2% 2% for the next 9 years or so till 2034. And this is also backed up by data from the business of fashion and McKenzie report that they publish annually. And you can see that sportsware in 2025 is expected to grow faster than the actual fashion apparel industry overall which is a great sign. And further tailwinds India is going to be a huge growth engine in the future. So when you take a look at India, it's actually projected to become the world's third largest consumer market by 2027. So if they do plan to enter that market in 2027, obviously it bodess well for Lululemon whereby they're getting exposure to an area whereby they could capture a large portion of revenue quite

18:25 easily because it's underexposed and undersaturated at this stage. However, the infrastructure is not yet up to par where people can enter and open plenty of retail stores to the masses. One more industry tailwind you could call it is the silver spenders. Now there is an argument that Lululemon tends to cater to the more mature women. Let's say somewhere in the range of you know maybe 25 to 35 or 45. and um call these silver spenders or the silver tsunami as I've heard it called before actual tailwind for the business because if people are underestimating the value of the older generation so basically they have the most spending power overall compared to the rest of the economy. Every year, business of fashion does ask industry leaders what they think the biggest

19:11 worry is in the apparel industry. And in 2023, it was inflation. In 2024, it was geopolitical instability. And as of this year, it's going to be consumer confidence to spend. The other frictions in place are going to be trade tariffs. And that's playing a part in the guidance because that's what's impacted Lululemon's guidance so far is they're factoring in the cost of these tariffs. And you can see this in the numbers. there's a 165% increase in the cost of the shipping from Asia to the US as well as five times the trade restrictions that existed prior. Are those costs going to be passed down to consumers? If they are, consumers are turning more value orientated. So, it's a lose-lose situation, I think, unfortunately. So, let's talk about the competitors and who they might be. Now, Lululemon lies somewhere along that scurve whereby it's not completely a mature business.

19:57 However, they're not in that early growth stage. So, they're somewhere in the middle. And you can see that in the number of stores that they have. Adidas has 2,000 stores. Nike has around a thousand stores. Lullemon 770 stores altogether. Uh and then you got Ali Yoga and Voiri. These are upandcomers. They are trying to displace the incumbents. Nike, Adidas, Under Armour, and Puma. These are what I would call not major players, more like legacy players because they've let the ball slip. And Lullemon has taken advantage of that athleisure space completely. they they are sitting around 10 billion dollars in revenue whereby of course Nike is still a leader because obviously it has a larger global presence as well as Adidas. So Nike has around $50 billion in revenue. Adidas is around half of that with $24 billion in revenue and Under Armour and Kuma smaller players

20:43 with around actually $6 billion in revenue and $9 billion in revenue respectively. But the premium challengers are coming and there's plenty of them. You could take a look at on running, Gym Shark, Fabletics, Sweaty Betty, Athleta, Ran, Vari, and plenty of others, but the biggest one of them all has to be Aloe. And Aloe is a massive, massive competitor to Lululemon. Make no mistake about it. And here's an important touch point. Data shows that 90% of Vori stores, 84% of Aloe stores are within 0.5 miles of the Lululemon store. I mean that's very common where you get like a kind of concentration of the same stores in the same area but they're fighting for the same customers and that's a problem for Lululemon. And this is where we take a look at the brand positioning for Lulle Lemon versus Aloe. So Alo Yoga is positioning itself as the bougie more boutique kind of ali

21:32 you know yoga brand compared to Lululemon. They're doing this takeover of a beach club which I think is I don't I I don't know what to make of this to be honest with you. It doesn't resonate with me, but apparently that's one of the things they did. They took over a beach club and they did some parties for Alo Yoga. I'm not sure what that is, but it's kind of like what they're trying to set is the tone. And you can see they're by their partnering with Kylie Jenner and Kendall Jenner. Not people I've personally followed, but I can see the appeal for a lot a broader younger audience of women who would be, you know, you know, fawning over these kind of saying, "Oh, I want to dress like them." And actually, they themselves say they're not, you know, sponsored to do this. They wear the clothes themselves, but of course they partnered with them anyways to help spread the message. And Al Yoga is expanding. It's expanding

22:18 rapidly. They've opened in the Middle East, but they've also opened in Brazil. Brazil is actually a very large economy when you think about it. There's 300 million people, 221 million, sorry, that live there roughly. And to be able to reach that target market and Lullem has zero presence there, I thought is a bit of a concern. And I'm like, hm, that should have been done maybe earlier, but maybe there's reasons that management says we're going to target India instead. Of course, that makes sense if it's ready. However, I'm not sure which one of those areas is right for the taking at this moment in time. And Alo is definitely positioned as the more bougie of the two. And you can tell like they have the name Aloe Yoga. And the fact is, well, they're called Aloe here, but they have another account whereby it's just Alo Yoga. And you can see it's

23:04 just a bunch of yoga poses. And that's what they're appealing to. They're appealing to their target market, their niche target market. And that's what I'm saying. If they are taking market share, it's at least in the niche market where they started off in actually Lululemon. So that's a little bit worrying that they've given up on their initial roots. However, if you're aware, Lululemon, the full name of the actual company is Lululemon Athletica. It's not Lululemon Yoga, it's Athletica. So in its foundation it was based on athletic athleticism or you know targeting a broader range of customers as opposed to just the yoga customer. So you could say potentially yoga if they do take that throne for you know the bougie you know fashion trendy wear you know kind of clothing that they appeal to kind of kind of those kind of customers that's

23:50 okay as long as Lululemon does not see the athletic leisure wear market completely whereby that's a much larger piece of the pie and this is again what we're talking about this is the business of fashion annual report we're talking about to win share brands will diversify their offerings balancing reach and cultural credibility This is what Lululemon is trying to do. They're trying to target this tennis and racket sport player. Um the person who they're going for, it's a demographic with, you know, a high appeal because it's rising in terms of number of people who are participating in the sport. And they're also targeting the runners and the hikers and the gym goers. Whereas Ali Yoga is probably still playing in this yoga area, which it's a niche kind of area. However, Ali Yoga is definitely leaning heavily into the beauty and the

24:36 fashion side of things as well. So, don't mistake this as the complete, you know, table covering all aspects because it's also outside of sports. And you can see here in the search trend history for the last 5 years, Alo Yoga is rising fast compared to Vari and it may be in the future competing with Lululemon. And as far as pricing, Lululemon is actually, I would say, just slightly below Alo Yoga. And here is the last part of the comparison that I'm going to be making to these competitors. You might be wondering, well, this is more financial related, but it's important to take a look at this because actually everything the brand does, everything these competitors do ultimately it leads to return a return on invested capital and that's what we're going to take a look at here. So we can say that the products by Alo Yoga is more differentiated than Lululemon but generally speaking the products both of

25:23 them are going to be very differentiated relative to the entire industry or the entire market. And you can see this this is a chart by Michael Moesson's work in I think it was Morgan and Stanley they released this and this highlights what the returns on invested capital and how it can be generated. There's different ways to generate a high return on invested capital. You could be like a player like Costco whereby you have very low margins but you have very high inventory turnover. Or you could be a much differentiated brand like Lululemon and have very high margins but lower turnover but you still have equal ROIC's. And this is important because we're going to take a look at this now. So let's break it down into the underlying drivers of the ROIC which is the NOPAT margin. That's the net

26:08 operating profit after tax. And also it's we're going to take a look at the invested capital. So first of all, not to get too heavy on you, we're going to take a look at the NOPAT margin and you can see when I compare Llemon. Now, of course, I would love to compare this to Ali Yoga. However, Al Yoga is not a public company, so I had to find some similar comparisons. Now I did throw in Under Armour there, Gak Nike and then OnRunning because although on running is not quite in the same category they are trying and I believe they will try to expand into that a half leisure space as well and it is a brand that you can say is maybe in a similar trajectory to Ali Yoga in terms of growth but it's just interesting to put it in there and lump it in anyways. So let's look at these.

26:54 Overall you can see that the NOPAT margin this is not net operating profit after tax Lululemon is head and shoulders above the rest by maintaining this. However, you could say there's a risk here because the margin has been decreasing over time from 17% up to 19 coming down. But it's not a straight line. So it might be that this is an inflection point of a much lower NOAT margin and eventually it might inflect upwards. In comparison, you can see that Nike is actually hovering all over the place at around 8%. And that's such a low margin in comparison to where Llemon sits. I don't think if I was to just look at these financial figures and say which business would I rather own, I would say Lulle Lemon just based on the margins. And on running, of course, it's

27:40 a company that's much younger, so it's much more difficult to assess. And you can see that they had negative margins at some point up to 13 down to 8%. However, this is also a very differentiated product and people are paying a lot of money to get this. So, you might have expected a little bit higher margins uh for on running and you can see this figure here in the invested capital turns is how efficiently is the company using its invested capital to generate revenue. Lululemon is actually surprisingly dipping down here in terms of their invested capital turns. Well, take a look at that closely now. So what happens here is that Lululemon was at 1.92 and 2.1 and then now it's dipping back and putting everything together you can see the ROC over time. Lululemon is sitting at 61% ROIC which is a

28:27 phenomenal figure. I mean it's it's an amazing figure to have although it is declining but it's declining from such elevated levels and of course some people argue there is this reversion to the mean whereby everything comes down to an average basically it comes back to a uniform distribution everything's spread equally however I would argue that despite being so high and it's reverting to the mean so-called the brand can because of the brand name brand brand name can extend this mean reversion period for much longer than people expect. So why is Lululemon's invested capital turns declining heavily? Well, actually out of all these companies that you see here, the only one I could highlight that is growing rapidly is Lululemon. What is why is it

29:12 growing that fast? So we look at Nike, Nike's invested capital is actually hitting a wall. It's staying flat. And the reason it's staying flat is because it's not investing heavily into stores. As you might have heard, Nike has shunned a lot of the stores in order to go more digital. And therefore, they're not investing as much as they used to. And therefore, when you have the denominator, which is the invested capital being flat and the revenue increasing ever so slightly, it's always going to look a little bit better. However, Lulu is reinvesting for growth. They are reinvesting for further stores, further distribution, and that is obviously what's eating at the invested capital turns. It's very evident when take a look at it like this. And then let's compare it to Nike for example. That's very obvious. Even when you compare it to a high growth company like on running, their invested capital is

29:59 growing very very fast. I'm not sure that's actually a very good thing. Depending on how fast you grow, there's limits to how fast you should grow. And this is what I mean. When we take a look at the return on incremental invested capital, this is where I get a little bit worried because there's a reduction a marked reduction in how much additional investment is generating additional I guess you could say returns on that investment. The ROI I see this this figure was sitting at 269. That's probably very elevated during that period 269%. However, it was sitting at 73% 22% 56% and now we're at minus 18%. meaning that any future investment that Lul is putting towards opening new stores is actually destroying value as

30:44 opposed to creating value. And that's the purpose of ROIC in order it's in order to lead to economic profit in the end. Okay. And that was a nice segue into the financials. I should have probably put this in the financial section, but because I was comparing them to the other players, I just thought I'd leave it there. Now, we're just going to look at specifically the financials for Lululemon. Okay, they've managed to grow revenue from four billion all the way up to 10.5 billion and that's at a 21% keer which is actually really really good. Holding a company at 21% keer for five years that's fantastic. Can they keep it up? That's the question. And you can also see from the blue bars that they're actually the growth revenue per share is a bit higher at 23% roughly and that's because they're buying back shares. But the question is here has growth stalled? This is what we need to find out. What we're looking at here is the revenue change year on year for Lululemon. And what we can see here is the full story

31:31 of the business. And you can see that currently the growth is actually slowing down all the way down to 7% yearonear. Now, this is where people are getting worried that the growth is stalling. And is this the first time that they've achieved these low levels of growth? Well, actually not. That's not the case. They've been in the same position before. around April 17th, they were around 4% growth year-on-year and then another time they were at 7% growth in January 14th. Now, let's take a look at the revenue per share change year as well. Well, we can see actually this is a much better figure and when you take that into account the year-on-year growth relative to the actual growth that you've seen before, this is 12%. Whereby at this period, they didn't have much buybacks and a lot of buybacks in

32:16 this area as well. So you can say 12% actually when you factor in the revenue per share, the buybacks growing at 12%. That's not bad actually, but that's not what has a lot of people spooked. It's actually the comparable sales figure. So what I mean by that, this is the total comparable sales growth from the same stores that they had opened previously. So it doesn't include new stores they've opened. It takes into account currency fluctuations and also takes into account that there was a 53rd, you know, calendar week in the actual annual report for 2024 and the fact is normally it's going to be 52 weeks, right? So they've normalized that and this is the growth that you get actually from the same store sales. So this figure takes in account DTC and their actual same store figures that they've had. It

33:01 ignores the opening of the new stores that they have each year. So maybe if they open 40 new stores, of course, that's going to inflate revenue growth because they sell in those stores. But we're just trying to see what the trend is like on the long run and are they having recurring revenue from these stores that they open? Unless they keep opening new stores, then they're going to lose revenue eventually, right? So these new stores that they're opening which are generating a lower return on invested capital and is inflating revenue is masking the actual underlying economics of the business. And the fact is that the recurring nature of these sales is reducing over time and people are purchasing less. So this is what has a lot of people concerned and what has me concerned. And I would urge a lot of people, as I said, there are some key points I'm highlighting throughout this video as to what to watch out for. Total

33:46 comparable sales figure is definitely one to watch out for. Can this bounce back or is it just going to be a landslide all the way down? The only thing I would say is that the comparables are comparing against the period where they had the highest revenue that was after the co yo-yo we were talking about earlier. So there's no data to go much further than that to see what's a comparable sales figure all the way back to you know 2013. But that's just something to keep an eye on. Okay. And just to share some of the margins with you over time. This is the quarterly data. Now it's just important to highlight there's a lot of seasonality in these quarterly numbers as opposed to the annual numbers. And so whenever you're comparing anything, so if you're looking at 8.5% in this quarter should be comparing that to this is one two three four and then it's one here. So compare there's been a drop of

34:33 around 110 basis points from 19.6% to 18.5%. And that's what also has a lot of people spooked about the operating margins fact that they're reducing and at the same time the SGNA is going up in part due to you know increased cost in marketing and general administration costs. So you remember what I said about Jeff Bezos quote I probably use this millions of times your margin is my opportunity and basically if they have to keep fighting the margins against the likes of Aloe for you know marketing and awareness then obviously that's going to take a hit on the margins eventually down the line and free cash flow also has a lot of seasonality baked into it as well. You can see that when you look at the quarter one free cash flow, which is in the blue, you can see that this is usually not a very profitable quarter for them. And of course, it's really bad

35:20 to see that it's in a negative. However, when you compare it to the upcoming quarters that we have, which is going to be Q2, that's usually much more positive. And then you have, of course, leading up to Christmas, we'll get in the Q4, I believe it is, it's going to be a lot higher. So whether or not that actually you know abates some of the concerns Mr. Market will have if you were to say be an investor but I think at least from my concerns about you know a bottom to this potentially this Q1 could be a bottom if you look at it like that. So for any apparel company one of the most important ratios to take a look at is going to be the inventory turnover ratio. Now, ideally that sits not well, I would say as high as possible. But most companies understand that if it's too high, and you're going to have empty shelves in the store, and you don't want

36:06 to have that, but ideally it sits somewhere between four and six, that would make sense for something like an apparel company. Um, I think Crocs has one of the higher numbers for this compared to Lululemon. And it's worrying to see that this number seems to be dropping precipitously over time from 2016 to now. The only explanation I can potentially put towards this is the fact that they're rapidly expanding stores and as you expand stores, you need to have inventory available in order to fill up all these stores and in you know easy access for customers who order. And one of the amazing things about their TD DTC model which I should have probably mentioned earlier is the fact they are using as also ful fulfillment centers for their orders. So, similar to how

36:52 Best Buy shipped their products in 2013, they are shipping their products directly from the stores as opposed to from a warehouse. And customers can come and collect from the stores as well. And when taking a look at the quarterly inventory, the rising figure here is primarily due to currency fluctuation as well as the impact from the tariffs. So, that's led to a 23% increase year-on-year and 7% of that is due to tariffs and currency conversion. So, what about debt and liabilities? Now, this is one of the highlights for this business is the fact that there is zero debt, at least zero interestbearing debt. They do have leases and liabilities as such for their uh stores that they have and their warehouses, but there is zero actual interest bearing debt. They have 1.3 billion in cash, which has actually declined compared to last year due to the fact that they've gone out and purchased the rights or the

37:39 acquisition of their Mexican-based stores that were previously franchised or licensed, but they've gone on and purchased a right. And you can see here evolution of the goodwill. We can see this is the purchase of the um mirror acquisition and you can see how much they've written off from that down to 24 million and now they've gone and purchased those I think they were 17 stores in Mexico and added a little bit of goodwill onto their balance sheet. Another important thing to look at in this business is their shares outstanding and buybacks. Share with you the actual breakdown whereby they purchased back I think 5.1 million shares at a total cost of 1.6 billion which implies an average share price of $313. And then there was a smaller amount that they've purchased in May 4th to May 30th of around 0.2 million shares for $55 million. That equates to around $278. So

38:26 they've been picking their moments and $313 is potentially in their mind a fair value for the stock. And if it is below their intrinsic value, then they should potentially accelerate that if they have the ability to do so. So briefly, we're gonna touching on management and culture. And this is the current CEO, Calvin McDonald. from 2018 till now he's running the show and Lemon's you know approval is around 4.1 with him sitting specifically at 83% for his approval as CEO. Now he does come with some experience. We didn't highlight this before but it's good to point out that he was previously CEO of the America's Sephora branch and also CEO of Sears and Canada as well. So he does have some pedigree and he's been climbing the ladder so to speak and he's also

39:11 considers himself an ultramarathon runner. Other things to point out about the management there has been a slight structuring in terms of key personnel in this business. Son Cho who you I would highlight here as one of the key personnel. She was instrumental apparently in increasing the product breadth that they had especially the footwear brands or footwear line that they had. But since she's left as a chief product officer there has been no replacement. So that's a bit of a concern. Nikki Nuremberg Newberger has taken over some of that role and she's sharing it with another one of the recent hires that they've had. So that is concerning whenever you have a chief product officer which I feel is a very important role that's being delegated to two people. But maybe it's the same as having I guess two co-CEOs. I'm not sure. But I hope that they found a

39:57 solution for this or maybe they're looking for someone to eventually fill that space. And let's take a look at the employee incentives because this is one of the more underrated aspects of any business is having happy employees. And you can see how this matches up with the figures we just saw for the ratings that that CEO had. Well, if you're they're getting monthly wellness amounts of $100 to $150 to do fitness classes that matches up with the whole ethos of like Lululem and I'm very happy to see that as well as they get parenthood programs for around 6 months which is much better I think than most employers which I don't know how much it is exactly in the US but I would I would hazard a guess of like around three months is the max you usually get and the competitive wages for retail positions 27% above industry averages that all I think is an investment in the company and that will

40:43 hopefully pay you know in multiples moving forward. Now let's take a look at the seauite compensation and this is probably one of the most important things to not underestimate because if the seauite or management team is aligned with shareholders it creates long-term value and if they're not it destroys value. I did highlight in the previous slide that Cal McDonald salary sits around 1.3 million annually and that's just base salary. On top of that you get a lot of other things such as a cash bonus and then you get PSUs and RSUs. What are those? Those are basically performance space stock units and restricted stock units. So you can see here out of his total compensation, he's getting 9% from his base salary and the bonus and the PSUs and RSUs account for the remainder 91% which is at risk. Now it's important to note that he doesn't actually have RSUs. So

41:29 everything he earns needs to be performance-based, which is great. The RSUs are just more like time vested in terms of like you have to wait for them to elapse and then you can collect your shares. But in this case, it's all performance-based, which is nice to see. The only problem is that these bonuses and the PSUs are calculated off of something that's probably not as aligned with shareholders as I would personally like. It's aligned with operating income and net revenue and the growth of that. So, you see how this all ties in together. Growing the stores grows the net revenue and grows the operating income. But the problem is when we look at the ROIC figure, the RC figure is deteriorating. So ultimately to create value, the ROIC figure should have been used as a long-term incentive for any compensation package I feel. So this is

42:15 a big red flag for me and I'm not sure if it's one I'm willing to say is a, you know, a nail in the coffin. Um, but it's just something that weighs on my mind and it should do to any investor whenever they're looking at the compensation packages. So what are the competitive advantages of this business? We're using the Hamilton Helmer framework. The only difference is I've added one extra thing which I consider pricing power and he actually mentioned himself that pricing power could have been one of those advantages. The process power I would give them 100% for and that is due to the fact that it's something I haven't highlighted really as much as I should have and I hammered at home is that they are very vertically integrated. They have limited wholesale. They are in control of the whole customer journey in most of their stores. So they can gather all the

43:01 metrics and data in order to analyze customer behavior and forecast everything in advance and they have a tremendous data on this. So this DTC model has led them to having higher margin than the counterparts as you've seen in the charts. All this while avoiding selling on Amazon and Tik Tok shops. And you could also add on top of the processing power their global operational expertise whereby they've been in China for 10 years in order to build that relationship and it takes time to develop that and I think you know as far as like advantage whereby is something being eroded away by Alo Yoga. If Alo Yoga tried to show up in I think China today they'd be shown the front door because there's it's a very difficult environment to work in and especially very difficult for foreigners. So, I think that experience adds to their advant competitive advantage. At branding, I would give

43:46 them 100%. Because I feel like this is almost synonymous to Coke. And if you think about Coca-Cola, the way it works is that people know what they like and say, "I'm a Coke drinker or I'm a Pepsi drinker." That probably the same goes for Lululemon. People say, "Oh, I prefer Lululemon. I don't prefer aloe." Or people say, "I'm in this camp. I'm not in that camp." And if you tell them, I'll put you in a blind test. I'll give you some pants. You don't know which ones are which. They're like, "I'll probably be able to guess because I know the feel and how the look of it." And that's the same goes for, you know, Diet Coke. And experiments have shown people are probably not as able to tell the difference between a Coke and a Pepsi whenever they put in a blind test. However, that's brand loyalty. And that's what you get whenever you're so engrossed in the brand. That's something that's very, very hard to replicate. As far as counterpositioning, this is to say that they're offering something that

44:33 their competitors can't or won't. You could have said this much clearer whenever they were starting off in the whole yoga space. the athleisure space, but everyone's now copying them. And in fact, they only have a little bit of counterpositioning because maybe of perception of branding. So maybe that it even doesn't exist. Switching costs are low, but they've done a very good job of making these fabrics appear patented and targeting different customers with them and saying, "Oh, you need this, you need that." But there are no trademarks and there are no patents. So overall, the switching costs are pretty low. Scale economies, I would say there's limited scale economies. You could argue argue one fulfillment center could target different areas. However, because of the geographical space that they occupy, every new space or every new store requires incremental more dollars. And as far as pricing power, this is

45:19 starting to wait. I would have given this much higher before, but given the fact that customers are becoming more valueoriented and all CEOs and industry leaders are highlighting that consumers are being a bit more discretionary with their purchases, I would say there might be a bit more price elasticity than there was in the past. So, in contrast, let's take a look at the risks. Now, usually there'd be a huge list of risks under the 10K filing, but I've tried to summarize these in the key risk that I foresee in this business. Competition, that's going to be huge. There's a lot of competitors in this space. They're trying to take Lululemon's profits. So, I do believe eventually the leggings will be commoditized just like jeans were. But it did take jeans a long period to be ubiquitous with all types of matters of people and it took a long time for Levi to lose their dominant market share. Additionally, brand

46:04 dilution that could be an issue. You can't be you know everything to everyone. Execution risk around the opening of new stores, how fast they open, where they open and capital allocation strategies such as buyback or poor acquisitions like mirror if they repeat themselves. And then of course there's macroofactors such as tariffs that are outside of their control. So in terms of valuation, what are we looking at today? I tried to offer you a bare case, base case, and a bull case. And this is to say that there are three scenarios here. Of course, there's multitude of probabilities out there. And this is not to say that the situation is what we'd call normally distributed. You have a, you know, a range of scenarios. And I feel because of how close we are to a bottom of this stock because the expectations are so

46:50 low, I don't expect revenue growth to be below 5%. And that's the base case scenario. Let's assume that the base case or sorry the bare case is 5%. We're just going to have 5% revenue growth for the next 5 years. And then eventually that reaches the level of the growth rate around the risk-free rate. So you're talking about 4% potentially. So, this is a 10-year DCF that I ran, and we're assuming that the margins will compress due to competition from 21.8% down to 20% and stay there. And that will give us a, you know, a fair value for the stock of $221. So, today's price sits roughly around $247. That would assume that we're going to get rate of return of 5.8%. Now, this is well below what I would expect to get

47:35 for myself or aim to get looking at something in the range of ideally 15%. So, we'll see if we can get that with the base case. The base case we're having similar situation where there's 8% revenue growth, 21% margin that compressed down to 20 and a fair value of 258. So, we're not very far off the current price. So if you do purchase today, it is with a small margin of safety and then you get price in 10 years of $549, a 7.5% return. Now we know the S&P returns around 8 to 9%. So this would be below the S&P benchmark return that we're looking for annualized and I would say yeah that is not exciting enough. However, the bull case is around 12.5% revenue growth with margins improving from 21.8 to 23%. And

48:21 that improvement I would say comes due to the fact that there is a slight compression due to the consumer habits and eventually over 10ear period that will correct and tariffs will correct and everything else will shift to more normalized environment and that would give us a return of around 11.5%. Okay, that's a little bit better. Is it worth taking the risk of say I will go with a 11.5% that's a bit more risky than a more stable 9% that you get with the S&P? Now I would leave that up to you. And finally, jumping to the key takeaways. Now, before I go ahead and do that, I just want to say thank you so much for watching this video. I do really appreciate it. As a small channel, obviously, it means a lot. It would mean a lot as well if you did leave a like and share this video with your friends and just leave some feedback in terms of how what you thought of the long form content. Would you prefer if I divided this video into

49:08 two different parts or three or maybe just summarize everything into 10 minutes if that's at all possible? I did have a question to myself if I could even do that but I would try if that's what everyone's asking for. So please do let me know. All right. So jumping ahead to the actual radar chart that I have in front of you. Now this is a new way I'm trying to format things in a more concise way. I think generally you could divide a business into two parts which is basically the valuation and the actual business. But it breaks it down a little bit better to see the risks the business the financials and management as well. So, in terms of the financials, I think these are almost impeccable. I know things are having a little bit of a turn for worse, but I'm basing this off of the history of the business, what it could potentially keep on doing if it

49:53 can maintain that. So, as far as that goes, I think that's almost a 7 out of 10, if not higher, 8 out of 10. So, basically, this is one of the strengths of this business. Maybe they even scored that as a 9 out of 10 if I'm not mistaken. So this is one of those things that basically off of the the ROIC and the margins they have and the growth rates they've had historically. This is why everything culminates in a high score for the financials. As far as the business goes, the business is really a mix of the competitive advantages that we discussed earlier and the future potential I see in the international markets. The competitive advantages could have been a lot higher. Instead of a seven, it could have been a 10 out of 10 if it could match at least five out of the seven. I would say in ter the competitive advantages I don't expect any company to be able to hit all of those competitive advantages that's including pricing probably five out of

50:40 eight I guess you could say in terms of the management now that's a little bit more harder to quantify because this is a new management team and it's really hard to judge them because they've never been through any tough cycles other than co but everyone had a you know demand brought forward during or after co so I can't really base that success off of them alone and this is the first time they're facing some secular headwinds. If they emerge better off at the end of this, then obviously then you could increase the score. The other thing that really brings the score down is the long-term incentives which are based on the growth rates as opposed to the ROIC. I think that means a lot to me to, you know, and therefore I score them or punish them heavily for that. It could have been a lot higher otherwise. In terms of risks, now the risk I would say is on a probability scale. Now we've

51:27 mentioned some of the risks and if you mention 20 lists you could say the risks 10 out of 10 but it's more about the probability of all those risks culminating and I would say cumulatively speaking maybe there's a 40% r you know chance of everything culminating together and therefore you know I don't give that level of certainty on risk but there's a chance less than 50% if you could anyone could pinpoint it of course we're living in uncertain worlds and we're just working with probabilities as far as the valuation goes the valuation I think I gave it I think around a seven as well because even though it's not in the 15% range which screams you know no-brainer you know it's still pretty good and it's above the return of the S&P if you do hit the bull case and I think there's more than likely chance that it could be in that category

52:13 because the returns are not evenly distributed there are more scenarios in place that could be much higher if they can eventually in five years time who knows gain entry into India and that's the uncertainty in the DCF that potentially, you know, you could, you know, simulate with a Monte Carlo simulation, but I just don't think it's necessary. I think I inherently know there's more upside than downside. As you saw, my worst case scenario was 5% growth rate. Best case was 12.5% and the median or the middle scenario was around 8%. So, there's more skewess to a higher, you know, upside and the downside is quite limited, I would say. So, that's everything so far. hopefully that you've enjoyed this content and I'll leave you with one last table to mull over if you wish and that's just the pros and cons. Otherwise, yeah,

53:00 hopefully I'll be able to release some more content for you soon enough. Hopefully at a faster pace given that I have a little bit more time coming up. Do let me know if what kind of content you're interested is it general market news, deep dives and any other sorts. So until then, take