A buyout? At this market cap and valuation?
Really, who could afford to write a check for 11 billion dollars + whatever the takeover premium would be?
Certainly not The GAP who has a similar cap.
Nike? Maybe possible, but incredibly difficult. Is there any historical precedent for this? Wouldn’t it be easier for them just to use their own brand and enter this space?
This is the main reason that I don’t screen for shorts that have market caps below 5 billion. There is just a much greater chance that someone could come along and instagram them by overpaying by 2 to 3 times. When GMCR had it’s highest valuation well north of 10 billion, I could be reasonably certain that nobody was gonna buy them out. GMCR was almost 2/3’s the valuation of SBUX at the time. LULU is basically bigger than all of its peers and could only be bought out by someone like NIKE and that just aint gonna happen at these multiples when they are roughly 25 percent of Nike’s total cap.
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With respect to Bodhi’s idea, that does seem very true. Yoga is on the up and up and has been for some time. However, this assumption that LULU is somehow going to grow into shoes, clothes, hats, golf clubs, tennis, god knows what, the way Nike did is a huge assumption one that I would discount at something like 98 percent which does not explain their valuation.
Right now their business model is to sell very expensive tight clothes to affluent people. This is a great business, but one that can’t really grow past a certain point where you have saturated this small group of affluent people willing to overpay like this. It’s also subject to being very faddy.
I seem to remember a time in college when every little rich girl I knew had the words “Juicy” written accross their asses.
In terms of expansion. NO FUCKING WAY!
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The US - they’ve already grown pretty as fast and hard as they could. Every high maintenance chick on the East and West coast is already in.
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Europe - Nope. The sky is falling there. Not to say they can’t pull it off, I bet they don’t even try. Really, when was the last time you heard a CEO on CNBC saying, “Yep, we’re spending a fortune trying to rampup sales in Europe. We really see it as the go to economy for sales growth in 2013.” Yep, they’re gonna love paying for that strong canadian dollar when the euro is at .70.
That leaves my favorite:
- Asia: Asians like to be conspicuous with their wealth. The last thing any Asian wants is to overpay for something that doesn’t shout, “Look at me I’m rich, Bitch.” This works well for austentatious brands like: Aston Martin, Rolls Royce, Luis Vuitton etc. Not as well for less showy but more granola-y brands things like Volvo or the Toyota Prius. Besides, Indians have yoga clothes that they have been wearing for 5000 years. Don’t think they need Canada’s improvement. The moment I hear that LULU is going to dive in headspeed into Asia I’ll know my thesis is right.
The only way for LULU to defend this valuation is to do what apple did. This is to start out with a small but incredibly loyal fanbase and come up with a product that is super cool and desirable by the entire world that cannot be easily imitated. Could they do this? Maybe. Big maybe.
This thing gets cut in half the moment there starts to be any doubt about their growth prospects. That happens by 2014 at the latest based on forward earnings predictions. They can probably meet this years earnings guidance but 2014 and 2015 look damn near impossible, especially in light of a recession.
The only way that LULU makes those earnings is if they invent a pair of stretch pants that allows women to eat as much as they want and not gain any weight.
