The Lululemon action is a bit like a yoga class. We've been following Lululemon's success for some time now, so when we saw her being worst S&P 500 performance, it titillated us.

For those who don't know, Lululemon is the world's #1 yoga clothing company. Since Covid, the brand has become a real fashion phenomenon - if you've been to the US or London recently, you can see it quite clearly in the street -: sales have risen from $4.0 billion in 2019 to $9.6 billion last year. And the results followed: earnings per share 2019 = $5 / 2023 = $12.2.

Of course, it's not just the leggings that have sold like hotcakes over the period, it's also the LULU action. It was trading at more than 50x earnings in 2021 and at nearly 40x by the end of 2023. Naturally, with such a multiple, there's no room for faux pas. Except that the faux pas came this year. First, in March, management announced ‘only’ 10% growth for 2024. Then in May, when they announced the departure of the Director of Product Development. In the space of a few weeks, we have gone from $500 a share to $300, down 40%.

Lululemon share

Source : Investing.com

And yet, when you look at the dossier, there are quite a few things that appeal to you. For a start, it's a profitable business with 40% return on capital. Next, clean balance sheet, no debt and $2 billion in cash. Above all, there are real reinvestment opportunities that will create value over time.

Today, 80% of Lululemon's sales are in the US and Canada. China accounts for 12% and the rest of the world only 8%. In the US, there is 1 shop for every 900,000 inhabitants. In Canada it's 1 for every 600,000. Europe is a different story: the best ratio is in the UK, with 1 shop for every 3 million inhabitants. In Germany and France, the ratio is 1:10. Today, there are fewer Lululemon shops in France than in Singapore or Hong Kong. In terms of geographical expansion, I think the opportunity is pretty clear.

 

Price to earnings ratio - Lululemon

Source : Investing.com

Of course, the only thing you can control when you invest is the price. Today, we are paying 20x earnings, the lowest level since 2014. We've got one foot in under $300. LULU publishes Wednesday night, a little downward dog kick would help us complete our position.

 

Market and portfolio focus

Behaviour:

From 24 to 31 May, the fund gained +0.2%, while the CAC 40 and S&P 500 lost -1.3% and -0.5% respectively.

No major movements on our lines during the period. It is worth noting, however, that fears about avian flu in the USA were again favourable for Biontech (+15bps).

We end the month with a gross equity exposure of 43% and a gross corporate credit and US long rates exposure of 44%.

Lines:

Grab your pens, there's been quite a bit of movement in the portfolio this week.

We exited our position in US short rates to increase our exposure to long rates when they approached 4.8%. We now have 31% exposure on this line.

We took advantage of the fall in the prices of Affirm and Aurora Innovation to double the weighting of our lines (1% each).

Finally, we got out of Sanofi and Orange following the completion of our theses on the dividend.

 

Have a great week,

Antoine