Lululemon Price Estimate Updated To $61

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LULU: lululemon athletica logo
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lululemon athletica

Lululemon Athletica‘s (NASDAQ: LULU) stock appreciated by nearly 75% in the second half of 2014. The yoga wear distributor and retailer saw its revenue fall by nearly 25% in the first quarter of fiscal 2014, but posted modest gains of 1.5% and 5% in the second and third quarters. Expectations about future growth have rebuilt following a miserable 2013, in which the company was caught in the eye of multiple PR storms. We have updated our price estimate for the company from $40 to $61. In our note below, we will discuss the key changes in our forecasts and the reasons behind them.

We have a $61 estimate for Lululemon, which is about 9% below the current market price.

See our complete analysis for Lululemon

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Revenue Per Square Foot Is Highly Sensitive To Number Of Units Sold Per Day

Consider the following data points:

– In fiscal 2013, Lululemon’s retail stores division made $1.23 billion in revenue.

-The company had 254 corporate owned stores standing by the end of the fiscal period.

-This implies that the company made a revenue of $13,256 per store per day in fiscal 2013.

-Assuming an average unit price of $80, the company sold an average of 165 units per store per day in the year.

-Assuming that each store remained open for 10 hours each day, the company sold 16.5 units per hour or a unit roughly every three and half minutes.

By the end of our forecast period, we expect the company to double its retail store count. If the company keeps the same rate of turning over units in all of those stores, we arrive at a CAGR of 9% for retail store revenue for the period. Keeping the rate would mean that by the end of the forecast period, the company’s retail store revenues have grown from around $1.23 billion to $2.63 billion. Based on our forecast, this means that the company’s revenue per store per square foot for retail stores would edge closer to its staggering $1,823 level of fiscal 2012 and reach $1,785 by the end of our forecast period. The new forecast for revenue per store per square foot is derived by pegging it to the unit turnover rate.

However, the revenue for the retail division is extremely sensitive to the assumption of the unit turnover rate. For example, if we lower our forecast from a unit sold every three and half minutes to every five minutes, the revenue for each year drops by an average of around 30%. The chart below shows the variation between retail revenues based on the unit turnover rate assumption.

The chart below shows the impact of the assumptions on projected cash profits for the company. The assumption of one unit sold every five minutes results in a 38% reduction in cash profits for the period, while an intermediate scenario in which the unit turnover rate declines from 3.5 to 5 over the forecast period results in a 20% reduction in cash profits for the period.

Other Revised Assumptions

We have changed the forecast for effective tax rate for the company. Previously the effective tax rate increased from 31.5% to 39% over the forecast period. We have changed the forecast to increase from 31.5% to around 35% over the forecast period.

The Capital Expenditure (CapEx) as a % of EBITDA for the Direct to Consumer division forecast has been changed. Previously, we applied the same forecast across all divisions for the company. However, seeing as how the CapEx has stayed in the $5 million- $6 million range, even as revenue has increased from $18 million to $263 million over the same time period, we have revised our assumptions for the rate. According to the revised forecast, CapEx as a % of EBITDA for the division should remain in the 5% range for the rest of the forecast period.

See our complete analysis for Lululemon Athletica here

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