Inventory turnover ratio is one of the most important ratios for companies in the retail apparel industry. If inventory turnover is well managed, inventory can move fast along with sales, and it will lead long-term success in the business.

QUESTION

Inventory turnover ratio is one of the most important ratios for companies in the retail apparel industry. If inventory turnover is well managed, inventory can move fast along with sales, and it will lead long-term success in the business.

“The inventory turnover ratio is important for the following reasons:

• It tells you how quickly your company is selling inventory
• It can be used as an accurate comparison to industry averages. This allows you to measure your company’s sales volumes and overall performance against the wider market.
• It provides one of the most critical measurements of your overall business performance.
• It gives you clear and valuable insight into the inner workings of your company, specifically how it manages inventory, sales, and costs.” (Chinh Nguyen)

Inventory turnover provides a picture of how well a company manages the inventory and sales. It also helps to predict future business performance. Higher turnover ratio is better since it shows the company sells its merchandise quickly and purchases new inventory in a timely manner.

According to the CSIMarket database, the average merchandise turnover in the retail apparel industry for the 12-month period ending December 2019, was 5.2. This means that every 70 days, on average, a retail clothing store would sell all its storings and replace them with new purchases. Lululemon’s inventory turnover is 3.8 which means it turns inventory every 96 days. Although the ratio is below industry average, it is still inside the safe line. Lululemon has many worldwide stores which need large amounts of storage space in different countries. Also, the unique marketing strategy, temporary stores, requires temporary inventory storages as well. It’s worth mentioning that Lululemon rarely had a discount or promotion. In this circumstance, as 95 percent of its merchandise sells in full-price, it is incredible having this turnover ratio. Lululemon is a growing business that is expanding its market and locations rapidly in recent years, it is rational to have a lower than industry average ratio in inventory turnover. However, compared with competitor, Under Armor, Lululemon is definitely in a better position. Under Armor had a 2.93 inventory turnover ratio for the year end on December 31, 2019. This means the company sells all inventory every 125 days. Other strong and large competitors in the athletic apparel industry such as Nike and Adidas, with turnover ratio of 3.92 and 2.78, respectively. Compared with all these matured business, as a new started and growing company, Lululemon’s management in sales and supply chain is doing well and

Return on Equity (ROE)

Return on equity is a ratio that shows how much profit a company earned compared with total common stockholders equity. This ratio compares earnings  and sum of common stock, paid in capital and retained earnings, so that it is easier to understand how much profit is generated from equity. It is an important ratio to show the company’s performance in return. This ratio is good to be used in comparing companies in the same industry and also good to be used in comparing historical performance to predict future expectations. It is better to have a higher ROE ratio since more money generated from equity, less earnings generated from liabilities.

According to the CSIMarket database, the average return on equity ratio in the retail apparel industry for the 12-month period ending December 2019, was 29.1%. For the fiscal year end on February 2nd, 2020, Lululemon has 37.5% return on equity which is higher than industry average. Return on equity ratio of 2018 and 2019 is 17.97% and 33.79%, respectively. This ratio is growing fast in recent years because of the increase in net income. With this above industry average ROE, the company will be easier to raise money for growth.

Compared with competitors, for the year end December 31, 2019, Under Armour has 4.42% of ROE. In the past five years, Under Armour didn’t do well on return on equity because of net loss in 2018 and low net income in other years. Its ROE is constantly below 20% and even below 0% twice. Due to coronavirus, it is predictable that Under Armour will keep its low ROE ratio this year. On the opposite, Lululemon has 1.1 billion dollars on hand to generate operations and face this difficult circumstance today, it’s return on equity is going to keep on this increasing trend, maybe slower due to the COVID-19.

Price to Earning Per Share

PE ratio gives the relation between the current market value and the earning per share of the recent year. A high PE ratio means investors are willing to pay more for this company’s share and believe this company will have good future performance in business.

According to the CSIMarket database, the average PE ratio for the retail apparel industry at the first quarter of 2020 is 18.2. For the fiscal year end on February 2nd, 2020, the EPS of Lululemon is 4.95, and the stock price as of May 21, 2020, is $267.53. Lululemon PE ratio is 54. In the past three years, PE ratio is 30.55, 41.16, 40.83 for 2017, 2018, 2019, respectively. Although the PE was fluctuating, it still shows an upward trend. Same for both EPS and stock price, they both growing stably in the past three years. Especially for the past three years, EPS is growing rapidly which is a good sign for investors that the company is growing and performed good in business.

Under Armour PE ratio is 41.1 on May 21, 2020. This is higher than the industry average, however, it didn’t have a stable trend in the past three years. For fiscal year 2018, PE ratio is zero due to negative EPS and jumped to 1057 PE ratio because of $0.02 EPS in 2019. Even at the end of 2019 and beginning of 2020, Under Armour didn’t recover from its bad performance. Although its EPS is increasing from last year, it is still less than EPS in 2016. Under Armour stock price is decreasing in the past three years. On the opposite, Lululemon stock price is growing really fast recently. More investors believe in the better future performance and business value of the company.

Return on Assets (ROA)

Return on assets shows how efficiently a company generated profit from its assets. High ratio means the company well managed its assets and used its available resources to make profit. Return on assets is also a good ratio for comparing companies in the same industry, so that investors understand which company is more efficient in using its assets. “If you’re comparing two similar companies in the same industry, ROA can go a long way in helping you see which one might be the better choice. One company may have a higher net income, but the other one could have a higher ROA due to taking on less debt. This doesn’t necessarily make one is a clearly better investment than the other. But many investors are looking for companies that have shown an ability to use their assets efficiently, as it can look to be a safer investment.”

Lululemon’s return on assets is 24.06% for the fiscal year end on February 2nd, 2020. Retail apparel industry average ROA is around 6%-14%. Lululemon’s ROA is higher than average which means it did a great job to make more efficient earnings in business. Although it is not as high as ROA between 2010 and 2012, it is still stably above average. The reason for lower ROA is that Lululemon is stocking cash for temporary stores and other marketing strategies. Some assets like cash are holding on hand instead of making more efficient profit.  Under Armour is not in the same situation, its ROA is 2.35% on December 31, 2019. Its ROA has been constantly decreasing in recent years and even dropped below zero. Compare with UA, Lululemon definitely has more ability to generated its assets efficiently, it is a safer investment.

ANSWER

Analysis of Key Financial Ratios for Lululemon and Under Armour in the Retail Apparel Industry

Introduction

This report analyzes three important financial ratios, namely inventory turnover, return on equity (ROE), and price-to-earnings (PE) ratio, to assess the performance and potential of Lululemon and Under Armour in the retail apparel industry. By examining these ratios, investors can gain insights into the companies’ inventory management, profitability, and market valuation.

Inventory Turnover Ratio

Inventory turnover ratio indicates how efficiently a company manages its inventory and sales. Lululemon’s inventory turnover ratio of 3.8 suggests that it sells its merchandise every 96 days, which is below the industry average of 5.2. However, considering its extensive global presence and unique marketing strategies, such as temporary stores, this performance is commendable. With 95% of merchandise selling at full price, Lululemon’s inventory turnover ratio remains satisfactory. In comparison, Under Armour lags behind with a ratio of 2.93, indicating that it sells inventory every 125 days.

Primary Health Concerns and Goals

Goal: Improve Inventory Turnover

Develop a more efficient inventory management system to reduce the time it takes to sell merchandise.

Implement data-driven strategies to identify slow-moving inventory and optimize product assortment.

Strengthen partnerships with suppliers to ensure timely replenishment of popular items.

Goal: Enhance Profitability and Customer Satisfaction

Conduct market research and customer surveys to understand evolving preferences and trends.

Innovate product offerings to meet customer demands and maintain a competitive edge.

Implement effective marketing and promotional campaigns to drive sales and attract new customers.

Return on Equity (ROE)

ROE measures the profitability generated from equity investment. Lululemon’s ROE of 37.5% surpasses the industry average of 29.1%. The company’s consistent increase in net income has contributed to this growth. With a high ROE, Lululemon enjoys a favorable position to raise funds for expansion and investment. In contrast, Under Armour struggles with an ROE of 4.42% due to net losses in previous years, which indicates its lower profitability and potential challenges in attracting investment.

Goals

Goal: Sustain High Return on Equity

Focus on improving operational efficiency to maximize profitability.

Explore new markets and expand product lines to drive revenue growth.

Continuously monitor and control expenses to maintain a healthy bottom line.

Price-to-Earnings (PE) Ratio

PE ratio reflects investors’ willingness to pay for a company’s shares based on expected future performance. Lululemon’s PE ratio of 54 indicates high market confidence and suggests that investors expect strong future growth. The upward trend in EPS and stock price supports this positive sentiment. On the other hand, Under Armour’s PE ratio of 41.1 is higher than the industry average, but it has been volatile due to inconsistent earnings performance. The declining stock price reflects concerns about its future prospects.

Conclusion

In conclusion, Lululemon demonstrates favorable performance in inventory turnover, ROE, and market valuation compared to Under Armour. Despite a slightly lower inventory turnover ratio, Lululemon effectively manages its inventory and sales, while its higher ROE and PE ratio indicate better profitability and investor confidence. By focusing on improving inventory turnover, enhancing profitability, and sustaining a high ROE, Lululemon can continue its growth trajectory in the competitive retail apparel industry.