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

Assets

$1.25 billion

$7.85 billion

$17.8 billion

Liabilities

$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.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers