Q: Your thoughts on LULU? They’ve performed very well for so long, but fashion trends don’t last forever. Do you see this year’s decline as an opportunity to start a new position?
5i Research Answer:
We agree fashion is fickle, but LULU has executed well since its 2007 IPO (at $18!). Its 40% hit this year has taken it down to 21X earnings, well-below its 10-year average (28X to 78X on an annual average). It has $800M net cash. EPS growth is still expected in 2025 (about 15%). Cash flow is high ($2.2B last 12 months). There have been new competitors emerging, and the Chief Product Officer just left. It has had a rough time with inventory, and had to discount earlier this year. But, other companies have struggled, and it does appear part of the problem is a stretched consumer. We think there is an opportunity, but sentiment is low and buyers can proceed slowly. It reports next week. We might start with one a 1/4 position.