Passing on LULU due to declining FCF estimates and a long turnaround timeline under new leadership.

So, in this video, we're going to run through the basics of Lululemon's business. We're going to look at some of their numbers, and then we're going to try to come up with a fair value for Lululemon stock to see if it's worth investing in today.

Now, Lululemon's stock over the past year or so hasn't done that well. The stock is down a decent amount. So, the real question is, is the stock going to recover? Why has this happened?

and can we profit from it now that it has happened.

And let's jump in and look at Lululemon's business broken up by segment. So Lululemon's business is broken up by who they're selling to, who their products, you know, designed to target.

Their largest segment is women's products. They started in yoga and they do things like leggings and outerwear and what they call ath athleisure athle athletic leisure something like that, right?

Athletic leisure wear. Basically, it's more of a high-end product. It has been, we'll come back to this in a minute, but most of the revenue is generated in their women's products, about 63% of their revenue.

Then their men's products contribute about 24% of revenue. Think uh shorts and shirts and you know running gear, things like that. Men's clothing about 24%.

But there is a problem there. management recently came out and said that the number of visits happening to the Lululemon stores are decreasing. In fact, they've seen a decrease in revenue for Lululemon United States over the past two consecutive quarters.

And that kind of speaks to the core of the problem that we're at. We saw the stock is already we saw it's down a whole bunch. This is part of the problem. Part of the problem is they're bringing in less people into their locations.

Now, many of their locations, it's not like a normal store where you might go and, you know, pick up shirts or a t-shirt. They have yoga studios. Some of them have, you know, they have events.

They have they've tried to build a brand that is built on this kind of the community aspect. But the and that has built them a premium band brand. By premium, I mean they sell for their leggings sell for generally a higher cost than other leggings that you might get at a different location.

Well, that being said, if that community starts to weaken, if you can get less people into the locations, well, then frankly, the way you get more people back into the stores is you reduce prices. That could hurt the numbers over the long run.

On the flip side, China is a growing piece of their business there. It's that on the other hand has seen a decent amount of growth, but once again, one of the issues there is that they've been opening a lot of stores.

So they've seen reasonable growth in China thanks to the store openings, but the same store sales have in fact decreased or let's say the they have decelerated in recent quarters.

So while you're not seeing the same problem in the broader numbers in China there there are certainly weak points when looking at that business.

So overall, you've seen a weakness in how Lululemon has like been able to shift their brand into the future. They started as a small company and ramped up here with that community.

But now that the community is starting to weaken and that community by the way as the economy if the economy were to struggle if there were to be increased costs with let's say things like gasoline or other expenses do you spend as much money on you know more expensive brands like like a Lululemon.

That being said before we can make any decisions let's jump in and look at some of the numbers. So, first up, we got a chart of revenue. And revenue has increased reasonably well over the past decade or so.

I mean, over in the early years, it was really ramping up. It has slowed down a bit in recent years, but broadly speaking, it looks decent. It's done fairly good.

But now, when we look at margins, and this speaks exactly to the story of how do you get people in the store if there's not as much, let's say, word of mouth foot traffic? Well, the way you do it is by reducing some prices.

If you reduce prices, your margins will go down. There will be pressure on your margins. And although margins have been somewhat volatile the past few years, in the past couple periods here, you can see that margins have in fact pulled back a bit and that has led to lower net income. net income over the past two periods have also decreased and this is a direct reflection of the pressure that Lululemon is feeling.

Now, they've also had a few controversies along the way. I was reading one uh kind of controversy that they had. It it was a little year or two ago at this point, but they shut down their e-commerce sales for a while because there were stories about, you know, people were buying the leggings and the leggings were see-through and that obviously hurts the brand.

I think that's one of the biggest issues is over the past two years this brand is drastically it's been hurt. It's been materially hurt that we can see it in their numbers now.

Now they recently brought in a new CEO. I'm talking like last week early September. They brought in a CEO Heidi O'Neal out of Nike. Not sure if that's a good thing or a bad thing, but she seems like she's we're it's gonna take a little while to see what her plan is.

We're going to have to wait to see how that develops, but she does seem like she knows what she's doing. And she came highly reviewed from everything that I've read from different analysts.

It seems like she could be a really good fit here. But it's going to take a little time to see how all of this plays out, whether or not his her plan is good enough to start turning around the numbers.

So, the question will be, will she be able to turn things around to help the stock make the stock better over the long run?

That being said, let's jump over and look at free cash flow and then we'll jump in and try to look at the fair value. So, first you can see that free cash flow broadly speaking has moved up.

It did move back. It did pull back a decent amount last year. It's actually had two years of declining free cash flow and then in the trailing 12 month it has jumped up a bit. So, it's done okay.

So that implies to me first thought that okay discount of free cash flow could be an interesting one to do an an interesting valuation method to look at.

But first let's look at price to earnings because I saw this on a lot of headlines and as we could see here this is a chart of Lululemon's price to earnings multiple over the past decade and right now it is without a doubt very low.

Now I would argue earlier on in the year, first five or so years of the decade, they were a fast growing company. That growth has really began to stall out. So it makes sense that some of the premium that you would have paid back then is now being reduced.

But without a doubt, it does look undervalued when it comes to a price to earnings multiple perspective.

But now let's let's look at it from a discounted cash flow perspective. So on the investors grow website, one of the one of the I think most useful parts of the website is analyst estimates.

So we have analysts coming in for thousands of companies from around the globe and seeing how many analysts are contributing to each of the years can be very valuable. And these green bars are analyst estimates.

And we can see we have 887 million. And we can see that we have 887 million in free cash flow expected in this current fiscal year. 22 analysts are contributing to that number.

That's a lot of analysts. This is an analyst from like big investment banks, Goldman Sachs, JP Morgan, companies like that.

But to me, the bigger thing to note here is look at the trend. This is actually unusual. Most industries grow. Most analysts expect the companies that they're analyzing in good industries for those companies to grow.

But here on average, those numbers are declining. Now, sure, we've only got three years of analyst, three analyst estimates in the final two years. But even if that's the case, it's not like those analysts look like they're crazy optimistic or pessimistic.

They're just kind of continuing the trend lower, which to me raises a real problem because right now we have the fair value at about $105 per share. That would imply that this stock is slightly undervalued right now.

We saw already it looks like it's undervalued from a PE perspective, but from a discounted cash flow perspective, it also looks like it's slightly undervalued.

But one of the assumptions that we're making here is a 2.5% perpetual growth rate. So we assume I came up with two and a half% because that's about the rate of inflation. It's higher right now but on average let's assume it's 2 and a half%.

Let's say that's closer to the target rate of inflation. And because of that if anything it's more conservative if we raised it. Uh then the fair value would go up as well. So I used a more conservative number 2 and a half% growth.

But is it fair with this company to use 2 and 12% growth? That is the default number here. But what if I change that to a 0% growth where it is no longer assuming that we'll grow forever and instead it'll just assume it stays the same.

Now that might be a bit pessimistic, but you can see that right away the fair value drops down to $86 per share. That's a meaningful shift.

So although the stock looks like it is it could be undervalued assuming there is growth I hesitate with it at this price to me I'm not sure it's fallen enough yet.

Now on the flip side if Heidi O'Neal were to come out and give her plan and announce how they you know why they think things are going to turn around and management over the past couple quarters management has continued to reduce forecasts for revenue and earnings per share and all that stuff.

They keep dropping the numbers. Granted, Heidi O'Neal just got in recently, so we'll see how things look under her going forward, but even if she does do a good job of turning around, it's going to take a little time.

It's going to take probably years for her to for her to sort that out. So, I think we might be better off waiting on the sidelines and just waiting and seeing how this develops.

And if they can come with come up with a viable way to turn this business around and get people back in the door, then this could be interesting. But for me, I get a pass on this.

But as much of an interesting company as it is, and my wife has some of their products, and I think that their products are interesting and they're good, are they worth the money?

I don't really know. I I don't, you know, I'm not sure. I I'm not much of a flashy dresser, as you could tell. But for me, I'm going to wait and hold off on this one.