Event Driven Strategies Special Situation: LULULEMON
BUY & re-iterating short UA
LULU US: US$ 40.23 ; UA US: US$ 58.88
June 23, 2014
Another US/Canadian apparel company, Lululemon, is under the event driven spotlight. Lululemon is a $6bn fast growing designer and retailer of athletic products, mainly for Yoga. The company was IPOed in 2007 at $9.00 and has been extremely successful ever since. Revenues have grown from $270m in 2008 to expected $1.8bn next year while net income has grown from $30m to $250m over the same period. However, as is often the case with high growth companies, LULU had a string of disappointing earnings reports and the stock recently corrected from a high of just over $80 in 2013 to the current $40. As a result, the Lululemon’s founder, Dennis “Chip” Wilson, in “in talk” with Goldman Sachs to look at opportunities aimed at maximizing LULU’s shareholder value. Dennis Wilson owns about 26% but has no managerial role in the company anymore and he has been a controversial if not wildly successful entrepreneur (http://fullcomment.nationalpost.com/2013/12/10/brian-hutchinson-lululemon-founder-isnt-dead-yet-hes-just-resting/). He recently tried unsuccessfully to remove two board members including the Chairman who had just replaced him.
Lululemon is a clear undervaluation outlier within its peer group. It achieves the highest profitability (20% operating margins, 32% operating return on assets). Moreover, in terms of growth, Lululemon is also undervalued, particularly vs. Under Armour.
FULL REPORT ATTACHED