Lululemon Management Is Confident About Creating Shareholder Value
Analyzing shareholder returns
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A dip in price: A buying opportunity
Plagued with problems from a product recall in 2013 and management changes (refer to Part 15 of this series), Lululemon Athletica’s (LULU) stock slumped by over 45% to $44.63 as of May 30, 2014, since it reached an all-time high of $82.28 on June 10, 2013.
In June 2014, LULU announced a $450 million share buyback program. The program is advantageous due to a couple of reasons.
- It’s an opportunity for the company to buy shares when prices are low, which increases returns for existing shareholders. This is all the more relevant since the company’s returns have been historically higher than the returns on the overall market, represented by stock market indices like the S&P 500 Index (SPY)(IVV), the Dow Jones Industrial Average (DIA), and the Nasdaq-100 (QQQ).
- Secondly, an increase in demand for shares, represented by the buyback program, would provide some price support for the company’s stock when prices are falling.
LULU bought back:
- ~1.4 million shares at an average price of $39.24 per share in Q2
- ~1.8 million shares at an average price of $40.49 per share in Q3
There hasn’t been a significant impact on diluted earnings per share (or EPS) during both quarters due to the time when these purchases were made.
As we mentioned earlier, LULU’s results were well received by markets, with the stock climbing over 13% to $52.95 (December 10–12). It was trading at a forward price-to-earnings multiple of 27.7x on December 12. At that level, the stock is valued higher than its competitors NIKE (NKE), VF Corporation (VFC), The Gap (GPS), and Adidas (ADDYY).
US sportswear apparel firms NIKE (NKE), Under Armour (UA), VF Corporation (VFC), and Lululemon Athletica (LULU) are also trading at a price-to-earnings ratio higher than the S&P 500 Index (SPY). This implies better growth prospects for the industry. The next article in this series discusses this outlook.
- Earnings before interest, tax, depreciation, and amortization ↩