Lululemon Athletica Inc (NASDAQ: LULU) is one of the stock surprises of 2020. The apparel maker best known for yoga pants is a high-priced stock.
For example, Mr. Market paid $366.50 for Lululemon Athletica (LULU) on 5 January 2020. Comparatively, Mr. Market paid $19.75 for The Gap (NYSE: GPS) on the same day.
In 2020, Lululemon’s share price rose from $235.43 on 6 January to $348.03 on 31 December. Thus, Lululemon’s price grew by $112.60 in less than a year.
Consequently, Lululemon is one of the few success stories in fashion retail today. An obvious reason for Lululemon’s success is that the company markets comfortable casual clothes people can wear at home.
How Lululemon Athletica Inc profits from Coronavirus
Since the beginning of coronavirus, many people have spent all or most of their time at home.
Notably, Stockrow estimates Lululemon’s revenues grew by 21.97% in the quarter ending on 31 October 2020. However, Lululemon’s revenues fell by -16.66% in the quarter ending on 30 April 2020 and rose by 2.22% in the quarter ending on 31 July 2020.
A professional woman, for example, no longer needs a skirt, blouse, and heels because she is working from the living room. Thus, the woman is probably wearing yoga pants which is good for Lululemon (LULU) and bad for department stores.
The circumstances that help Lululemon grow could continue for months or a year. Notably, The New York Times reports “virus numbers are surging.” Similarly, The Times labels vaccine rollouts sluggish.
Coronavirus will get worse
Similarly, The Washington Post claims 20 million doses of COVID-19 vaccine had not reached state governments on New Year’s Eve 2020. In October 2020, U.S. Secretary of Health and Human Services Alex Azar claimed 100 million doses of vaccine could be available by the end of 2020.
Thus, I predict the pandemic and its effects including quarantine and work from home will continue for the foreseeable future. Notably, authorities reported 108,055 new coronavirus cases in the United States on 3 January 2021, Worldometers estimated.
Coronavirus will get worse as vaccine distribution lags. I predict that situation will lead to more remote work and demands for Yoga pants.
Does Lululemon Athletica make money?
Lululemon Athletica (LULU) makes make. For instance, Lululemon Athletica reported a quarterly operating income of $204.92 million and a quarterly gross profit of $627.35 million on 31 October 2020.
The quarterly gross profits rose from $489.50 million on 31 July 2020 and $334.40 million on 30 April 2020. The quarterly operating income rose from $124.41 million on $32.75 million on 30 April 2020.
However, Lululemon Athletica began 2020 with a quarterly gross profit of $810.83 million and a quarterly operating income of $416.49 million on 31 January 2020.
How Much Cash does Lululemon Athletica Generate?
Lululemon (LULU) generates some cash. The company reported quarterly operating cash flows of $25.34 million on 31 October 2020 and $181.31 million on 31 July 2020. The quarterly operating income rose from -$121.24 million on 30 April 2020 and fell from $574.21 million on 31 January 2020.
In contrast, Lululemon Athletica reported ending negative quarterly ending cash flows of -$41.42 million and -$300.01 million on 31 October 2020 and 31 January 2020. The quarterly ending cash flow fell from $823.01 million on 31 March 2020 and rose from $507.35 million on 31 January 2020.
On the positive side, Lululemon Athletica reported low quarterly financing cash flows of $750,000 and $8.43 million on 31 October 2020 and 31 July 2020. The quarterly financing cash flow rose from -$90.59 million on 31 March 2020.
Thus, I think Lululemon Athletica is not borrowing much money. However, Lululemon Athletica had $632.65 million in long-time debt on 31 July 2020. Stockrow did not report Lululemon’s debts for 31 October 2020 but reported the company and $730.88 million in current liabilities on the same day. Lululemon had $1.465 billion in total liabilities on 31 October 2020.
Lululemon had $481.58 million in cash and short-term investments on 31 October 2020. In 2020, Lululemon’s cash and short-term investments fell from $1.094 billion on 31 January 2020.
Hence, Lululemon is not a cash-rich company but I think it has potential to be cash-rich.
Mr. Market Overvalues Lululemon
I think Mr. Market overvalued Lululemon Athletica Inc (NASDAQ: LULU) at $366.50 on 5 January 2020.
I believe Mr. Market overvalues because it had $3.628 billion in total assets on 31 October 2020. I do not think $3.628 billion in total assets supports a stock price of $366.50.
In addition, I cannot see the 491 stores Lululemon Athletica operated in February 2020 could be worth $366.50 a share. Finally, competitors can easily imitate Lululemon’s signature product; Yoga pants. Thus, Mr. Market grossly overvalues Lululemon Athletica.
I think investors need to avoid Lululemon Athletica’s stock because it pays no dividend. In the final analysis, buying Lululemon Athletica yoga pants makes sense, but buying LULU makes no sense.
Originally published at https://marketmadhouse.com on January 5, 2021.