Lululemon Athletica Inc. Business Analysis Essay

Lululemon Athletica Inc. is a sportswear company founded in Vancouver, Canada in 1998. Lululemon sells high-quality products for activities such as yoga, running, training, and most other sweating sports. When you visit Lululemon, you will find sportswear for men and women, including yoga pants/leggings, sports bras, water bottles, jogging pants, yoga mats, jackets, etc. 

Analogous competitors in the industry of high-end sportswear are often referred to as Nike, Victoria’s Secret Sport, Athleta, Fabletics, Under Armour, etc. Lululemon does have many options, all of which can be found on their website, including some online inclusive pieces. 

Small changes were noticed in the percentages when looking at the vertical analysis of Lululemon’s income statements. The exceptions were the amortization of intangible assets increasing to 0.12% in the most recent year compared to 0% in the previous year. Acquisition-related expenses increased from 0% to 0.68% from the previous year to the most recent year. Other income (expenses), net decreased from 21% in the previous year to -0.01% in the most recent year. These changes resulted in a 2.84% reduction in net income.

As to the horizontal analysis of the income statements, there were few large changes. Selling, general, and administrative expenses increased by 20.59%. Amortization of intangible assets increased by as much as 17693.10%. Other income (expenses), net decreased by 107.68%.

In terms of liquidity, Lululemon’s receivables turnover ratio is very high, this indicates that the company can quickly turn its receivables into cash. With a receivables turnover ratio of 85.79, this tells us that receivables turnover is collected 85.79 times per year. The inventory turnover ratio came out to 3.32, this indicates that inventory is selling quickly, less cash is tied up in inventory, and the risk of inventory becoming outdated is low. The current ratio was 2.41 to 1. Meaning for every $2.41 in current assets, they have $1 in liabilities. The acid test ratio was 1.37 to 1, with this information it would be safe for us to say lululemon has more than enough liquid assets available to pay current liabilities as they become due.  

Now, let’s take a look at solvency. The debt-to-equity ratio in 2020 was 68.08%, but it was 63.58% in 2021, so it dropped by 4.5%. The higher the debt-to-equity ratio the high the risk of bankruptcy, so over the course of one year Lululemon decreased this risk by nearly 5%. Times interest ratio increased from 109.34 to 1289.29 from the previous year to the most recent year. This tells us that Lululemon has more than enough income to cover their interest payments. 

Lululemon appears to be very profitable. With a gross profit ratio of 55.98%, Lululemon sells its merchandise for a little more than double what it cost to produce. Return on assets is 15.77%, so Lululemon generates 15.77 cents of profit for every dollar of assets. Return on assets can be divided into two ratios: profit margin and assets turnover. The profit margin for Lululemon in 2021 is 13.38%, meaning that for every dollar of sales, a little more than 13 cents goes towards net income. Asset turnover is 1.18, so Lululemon generates $1.18 in annual sales for every dollar they invest in assets. Following we have return on equity measuring 26.11%, which is very similar to return on assets. Its net income is 26.11 cents for every dollar Lululemon invested in equity. At the end of year period, Lululemon’s closing stock price was 328.68, and the company’s reported earnings per share for 2020 was 4.52. This represents a price earnings ratio of 72.72. This means the stock price is trading at 72 times earnings.