Say What You Want About Lululemon But Its Balance Sheet is Rock Solid

Lululemon's balance sheet is proof that the company still has its operations together.

Jul 9, 2014 at 2:00PM

It seems like everyone is criticizing lululemon athletica (NASDAQ:LULU) these days. Between the company's product issues with quality, controversial public statements made by the company's Founder Chip Wilson, and difficulties in finding a new CEO, the yoga-wear retailer that was once the darling of Wall Street just can't seem to get it right. However, amid all of its trials and tribulations, shareholders and analysts seem to have forgotten just how strong a company Lululemon really is. For proof, look no further than the company's balance sheet.

The ins and outs of a balance sheet
There are three types of financial statements that investors use to evaluate the health of a business. The first is a company's income statement, which details the company's revenue, costs of goods sold, and profit for a certain time period. The second, which is a little more complicated, but just as useful, is a company's cash flow statement. These statements track cash as it goes in and out of a company and is used to gauge how much cash a business actually generates for investors. The last type of financial statement individuals can use to evaluate a particular company's strength is the balance sheet. Unlike the other two, a balance sheet does not reflect results over a certain time period; instead, they simply reflect the company's assets (what it owns), its liabilities (what it owes to creditors and other businesses), and its shareholders equity (what shareholders have a claim on once creditors are paid.

There are many ways for a company to fund its operations and looking at the balance sheet can be extremely useful in assessing just what type of business you are dealing with. Strong companies have little debt, and if they do make use of any of it, it is often times because it's the most cost-effective way to fund its operations. Weak companies that find themselves in trouble will likely see their balance sheet look increasingly poor as time goes on with total debt going up and up.

Give Lululemon some credit
Those that have been complaining about Lululemon and its recent moves aren't giving the company due diligence. Compared to its competitors in the athletic-wear space, Lululemon's balance sheet is quite noteworthy, and will likely see the company through many years of troubles. Using each company's balance sheet below, we can determine their debt to asset ratio, where debt includes both short and long term debt and where assets include both tangible and intangible assets. This will give us an idea of which company is in better financial shape.

Balance Sheets for FY 2013:

Financial Metrics

Lululemon athletica – 2/2/2014

The Gap, – 2/1/2014

Nike, – 2/28/2014


$1.25 billion

$7.85 billion

$17.8 billion


$153 million

$4.79 billion

$6.7 billion

Shareholder's Equity

$1.1 billion

$3.06 billion

$11.1 billion

Everyone knows that both Nike (NYSE:NKE) and The Gap (NYSE:GPS) are great companies in their own right. What they may not know is just how rock solid Lululemon's balance sheet is. While The Gap has a debt to asset ratio of 0.61 and Nike has a debt to asset ratio of 0.38, Lululemon has a debt to asset ratio of just 0.12. What this tells us is that The Gap and Nike have a greater pull or leverage than Lululemon; however, with greater power comes a greater financial risk. Therefore, Lululemon is in better financial position. While it's hard to imagine any of these three companies ever falling on truly hard times, it's clear that Lululemon won't have creditors to worry about if it should run into a fix.

Foolish takeaway
Investors can say what they want about Lululemon's products and management, but one problem the company doesn't have is a burdensome debt load. The company makes little use of debt financing because its operations are strong and profitable enough to fund the company's expansion. Foolish investors should take this into account when evaluating Lululemon as a potential investment. One thing is certain: Lululemon's balance sheet alone makes it worth a closer look by investors.

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Natalie O'Reilly has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica and Nike. The Motley Fool owns shares of Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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