LULULEMON’S PROBLEM
LULU Forward P/E Multiples, Koyfin
A year ago, I was a big Lululemon (LULU) bear.
The stock traded in the $240s and shed light on one of the worst management decisions made in the entire apparel industry.
Because of tariffs being placed on Vietnam (where 40% of Lululemon products come from), the company decided to increase their inventory spend by sixfold.
Anyone who understands the apparel industry knows this is financial suicide, specifically because:
You build too much stock ahead of trend and season changes
When these shifts hit, you will be faced with massive discounts on current inventory
Free cash flow suffers, reduces your flexibility, and directly affects earnings
Today, you’re seeing the unfortunate effects of this decision.
Whether the recent quality concerns are temporary or structural almost doesn’t matter for today’s deep dive.
Markets have already punished the stock as though this is a permanent situation, so much so that Forward P/E multiples are back to 2009 levels.
And,
What’s driving most people away from the brand is exactly the reason I want to start backing it.
This may sound crazy, but think about it…
Today’s quality decline is the side effect of the inventory decision made last year, and as management starts fixing that mistake, you can only imagine what the next 12 months may look like.
Especially in a world where tariffs are being lowered and even overturned in some cases.
Even though Lululemon now offers a fantastic risk/reward deal, I am not one to prematurely anticipate a recovery.
Neither should you, as nobody really knows where the bottom could be for this company.
That’s exactly why I am looking to hedge this investment with a derivative sleeve in a company that is almost its mirror image…
Apparel North American Revenue Trends, Offside Capital
Some of the legacy brands in the industry are losing North American market share in real time.
Names like:
Nike
Lululemon
Adidas
Under Armour
Are all posting revenue declines in the US market, so while this is a Lululemon-specific issue, they are not the only ones suffering from the downtrend in consumer confidence.
Other brands, however, keep posting 30% revenue growth in the US.
One company is still growing revenues above 30%.
That completely changes how I want to express this trade.
Rather than betting everything on one turnaround…
I found a way to combine:
A deeply discounted value opportunity
A high-growth momentum business
One equity & options sleeve structure
To create a much more asymmetric payoff than buying either name by itself.
Why?
If the turnaround never comes, this options sleeve will more than make up for lost time or further drawdowns.
The end result is a risk-free run from here on out for Lululemon.
That’s the framework we’ll build today.
Can Lululemon turn its business around? If so…
How do we structure the trade?
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