Just How Profitable Is Lululemon Athletica?

Compared to those of its fellow retail rivals, lululemon's balance sheet has a lot going for it.

Jul 10, 2014 at 1:00PM

Lululemon athletica (NASDAQ:LULU) has been attracting a lot of competition in recent years. Not only did Gap (NYSE:GPS) acquire and grow the Athleta brand of yoga-wear expressly to compete with lululemon and get its share of the growing yoga market, numerous other retailers, including Victoria's Secret of L Brands (NYSE:LB), have also begun stocking their shelves with premium-priced active-wear and yoga apparel. This, of course, begs the question -- just what is so great about lululemon's business that warrants all of the imitators?

It's all about returns
One of the most, if not the most, important metrics for evaluating the profitability of a business is its return on capital. The number, expressed as a percentage, is calculated by dividing a company's net income by its assets. This basically compares the annual return of the business with the amount of money that has been invested in it. This is important because it lets shareholders and the company's management know if they are doing a good job. Unfortunately, this also lets competitors know they can make money by opening up competing operations if the retailer reports exceptional returns. Unfortunately for lululemon, that seems to be the case.

Yes, it is that good
Lululemon's profitability compared to the total amount of money that has been invested in the business is, to put it simply, pretty incredible.

Return on Assets:

Company Name

FY 2011

FY 2012

FY 2013

lululemon athletica

29.1%

26.4%

22.2%

Gap

12.5%

16.3%

17.4%

L Brands

15.4%

17.6%

16.5%

Even though it has gone up against two of the strongest retail brands in the world, lululemon has managed to generate some fantastic returns. Lululemon's return on total capital is even more impressive when investors realize that the company's total asset balance of $1.25 billion includes a huge cash balance of $698 million. This means that out of that $1.25 billion in assets the company needs far less than that number to fund its operations.

It's no wonder why Gap's Athleta, L Brands' Victoria's Secret, and numerous other retailers are trying to get in on the yoga and active-wear scene. From these figures, it appears that Gap has increased its return on assets more consistently than L Brands, where return on assets actually slipped in fiscal 2013. For now, both Gap and L Brands still have a ways to go before their returns on assets equal those of lululemon.

Foolish takeaway
Foolish investors should definitely remember the true strength of lululemon's business when they evaluate the company's shares. The company has had its share of troubles in the past, but its success seems to be attracting competition from all sides. Only time will tell if lululemon's brand is strong enough to withstand this competition. However, if returns on capital are any indication, it seems that lululemon's competitors won't be able to touch lululemon's fantastic profitability for a very long time. 

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Natalie O'Reilly has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica. 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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