Video summary
The video analyzes Lululemon's recent stock decline below $100, attributing the drop to a combination of shifting consumer fashion trends and specific operational missteps in China. The speaker notes that while comparable sales have decreased by 9% and revenues are down significantly, the company remains fundamentally profitable with strong free cash flows exceeding one billion dollars. A major factor cited for the recent downturn is a marketing blunder involving the use of a Japanese drum at a key Chinese event, which negatively impacted sales in that region. Despite these challenges, the speaker argues that the sportswear industry is inherently volatile, driven by unpredictable fashion cycles where stocks can plummet dramatically, such as Nike's previous 75-80% drop, once trends shift away from a brand.
Despite the current ugly financial picture with double-digit revenue declines and international sales struggles, the presenter maintains that Lululemon represents a compelling value opportunity at these price levels. The stock's market capitalization has fallen to approximately $11 billion, resulting in a P/E ratio around eight or ten, which is considered attractive given the company's ability to still generate roughly $9 per share in earnings and maintain profitability even under pessimistic scenarios. The speaker highlights that inventories are being managed well without booming levels, suggesting the core business remains intact. Furthermore, the potential for a private equity takeover is discussed as a catalyst that could drive the stock price higher, with estimates suggesting a valuation between $15 billion and $20 billion if such an acquisition were to occur, offering significant upside for current shareholders.
The analysis concludes that Lululemon is currently undervalued due to its strong brand equity, substantial cash reserves, and the possibility of strategic changes under a new CEO who aims to revamp the company's direction. The speaker references Michael Burry's decision to increase his position in the stock as further validation of its buy status, noting that the margin of safety is robust with over $1.5 billion in cash on hand. While acknowledging that fashion trends could cause the stock to fall further, the presenter believes that at this price point, the risk-reward profile is favorable for investors looking for a turnaround story. Ultimately, the video suggests that while the situation looks bleak on the surface, the underlying fundamentals and potential for external intervention make Lululemon a strong candidate for investment today.
Read the full video transcript
Good day, fellow investors. I couldn't
sleep this night, woke up around 2:30. I
sensed a disturbance in the force.
Or maybe it was just a mosquito. Anyway,
Michael Burry did send an email, whether
he disturbed the force, I don't know.
However, Lululemon is a lemon and now
below 100. Don't know where it will open
today, but it's always an interesting
story. What happened? Well, we have
revenues finally decreasing
significantly, 4%. Comparative sales
decreasing 9%. If you compare that to
the previous quarter, it was bad, but
not that bad. It was still a growing
company. Comparable sales also up. If
you compare it to 2024,
it was looking much, much better with
higher profits. Now, we discussed the
sportswear industry recently looking at
all Nike,
Lulu's, on on, and concluded how at the
end it is all about customer preferences
first,
what will be in fashion that year, what
will grow, what won't grow, and that is
very, very hard to predict. Something is
in fashion, the next year something
else.
The problem is people buy the people buy
those stocks that are in fashion, and
then they are surprised when those
stocks like Nike fall 75% or
80% like Lululemon as the trend shifts.
However, we also said that at some point
it gets so ugly, it has to be value.
Let's discuss that. Market cap now after
18% down will be 11 billion. P ratio
will be eight, likely around 10 on the
guidance.
And then if we look at the situation,
yes, sales are down 12%.
International sales also down. [snorts]
There have been some issues in China.
However, earnings
still there, still profitable. There are
some tax refunds, okay. And then they
also did repurchases. All in all, the
company is still profitable, the company
is still there. Inventories are not
booming, so they are managing that okay.
Revenues outlook still declining,
double-digit decline. This is big for a
company to say. For the year, still $9
per share in profits. Even if the
situation is terrible next year, they
will still make around five, six dollars
in profits. But, net income is still
there. So, just what's that? 20% down.
If we look at the earnings call, revenue
growth only 4% in China. That is because
they made a big mistake with using a
Japanese drum at their main Chinese
event for the year. And that happened in
June. So, this hit should be even
greater as the quarter ended in July.
So, revenues much lower than expected,
and that will also trickle down likely
in this quarter. But then, I looked a
little bit at the conference call, and
what can one say? Scuba teddy state,
super loft fabric.
The fine friend metal vent tech tees,
golf tops.
Mean wool leave, Lewis Hamilton. This is
getting crazy. The breezily dance studio
pants. Of course, the company is having
declining sales of 10%. However, a bit
of a slow start can also be a way to put
it. However, we have a a company that
has been growing. If it stabilizes
somewhere, people like this breezy,
dancy, pancy, and then we still have
trailing revenues. We still have
trailing net income and free cash flows
of above a billion. The guidance is
still for EPS of nine. That might be a
little bit lower. I don't know, at
seven. That depends on where analysts
see it next year. Times 15, and there
you are close to the price. New CEO will
do her best to revamp things. Trends
always change. It is cheap, yes. And
then there is the private equity takeout
situation. If you look at the owners,
institutional, so that might go there.
The problem is those who bought at 500,
at 400, at 300, at 200 would not be
happy with a takeout at 120, 130 that a
PE firm might be happy to pay. 13, 15
billion for 1 billion in cash flows. 1.5
is a great buy. Perhaps even 20 billion,
which would be a price of 200. So, from
this perspective, the ugly is getting so
ugly that at this point it might be
really valued. The margin of safety, 1.5
billion in cash, market capitalization,
it is profitable. The brand is there.
50% or more upside on private equity
speculation. If the CEO is hired to sell
the company.
So, something will happen.
This might be the ugliest. Perhaps next
quarter, still the CEO with will kitchen
sink things. Try to rebalance, new for
this, new that. We'll see what her plan
will be. However,
better than this it doesn't get. It's
Michael Burry's biggest position. He
will be doubling down
around 100 and below. I don't know how
much yoga he does, but maybe some crazy
fluffy design dance studio pants would
help him in making a better decision.
Me personally, I said I don't need this
kind of disturbance in my life. So, for
me it's not, but it certainly looks like
a good buy now. We discussed Nike, so
you can check also that video in the
link in the description below.
And I'm looking at it and I'm saying,
"Now it is cheap. Somebody will take it
out. Something will happen." And that's
about it. But, it's always fashion. It
can always go even lower depending on
what happens with the
tricky fashion trends.