Lululemon by the Numbers (Chapter Three)

Lululemon by the Numbers (Chapter Three)

                When I first started college, I dreamed of making money in the stock market, maybe even enough to finance my education.  I watched the ticker tape of stock performance, originally overwhelmed by all of the different ratios that measure a firm performance.  What I learned was that some simple accounting measures can evaluate firm performance and get a sense of how well company managers are achieving their strategic priorities.   These financial measures are not without limitations; accounting measures aren’t good at accounting for brand loyalty or manager discretion in choosing accounting methods and don’t account for the short term bias—that sometimes measures are understated because accounting measures of performance are calculated on an annual basis. 

Lululemon’s performance measures are captured on stock analytic websites, in this case Marketwatch.   Lululemon’s statistics can give us a sense of the company’s performance.

(Marketwatch) - "Lululemon Athletica Inc." LULU Key Statistics. MarketWatch, n.d. Web. 29 Jan. 2015.

I won’t cover all of the ratios but highlight a few examples below. 

Activity Ratios: 

Receivables Turnover:  (Annual credit sales/ Accounts receivables)  -  A measure of the average time it takes a firm to collect on credit sales.  Here it is takes Lululemon an average of 174 days to collect on their receivables. 

Liquidity Ratios: 

Current Ratio: (Current assets/Current Liabilities) - A measure of the ability of a firm to cover its’ current liabilities with assets that can be converted into cash in the short term.

Quick Ratio: (Current assets – inventory)/ Current Liabilities) -  A measure of the ability of a firm to meet its short term obligations without selling its current inventory. 

Here Lulu can cover its’ current liabilities 8 times and can meet its short term obligations 6 times over. 

Are these good ratios to have?  The answer is…..it depends. 

Athleta – Lulu’s closest competitor, whose parent company is Gap, posts these statistics.  

("Gap Inc." GPS Key Statistics. Marketwatch, n.d. Web. 29 Jan. 2015.)

Comparing these ratios – the Gap collects on its’ receivables much quicker than Lulu does but Lulu looks to be much more liquid, or healthier at being able to cover its’ debt obligations by ratios of 8 to 1 and 6 to 1.

So ratios and stock statistics are helpful when choosing between two different companies for investment purposes.  However, understanding one or two ratios are not enough to understand and analyze the complex dynamics of company performance for that more work must be done to understand the firm.