Steve Mandel (Trades, Portfolio) is the founder of Lone Pine Capital. He has a terrific track record with his long/short equity portfolio, which began in 1997. Previously he was a senior managing director and consumer analyst at Tiger Management (1990 to 1997) under Julian Robertson (Trades, Portfolio) and a mass-market retailing analyst at Goldman Sachs (1984 to 1990). Lone Pine Capital got its name from a tree at Mandel's alma mater that survived a lightning strike.
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Warning! GuruFocus has detected 2 Warning Signs with LULU. Click here to check it out.
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The intrinsic value of LULU
Lone Pine Capital invests globally and goes both long and short to be ready for those lightning strikes. The company employs rigorous fundamental analysis. I've heard Baupost Group's Seth Klarman (Trades, Portfolio) compliment him about his tremendously strong business specific research. Mandel isn't a pure value guy as you'll see, and tends to hold stocks for shorter time frames than most gurus.
Recently he bought into Lululemon (LULU), a retail chain specializing in yoga wear. Because Mandel does very strong bottom up research and is a retail specialist, it might pay to dissect what his reasoning could be here.
Yoga and active wear in general is still becoming more popular, not just in the U.S. but also in Europe. Some of the activewear brands are also absolutely killing it in terms of pricing, which brings them great margins. Lululemon has definitely established itself as a player inside the U.S., but its number of stores (about 300) is still far below what could ultimately be possible, and that is even more true in Europe. Just take one look at its website to see what a terrific business it is:
Charging in excess of $100 for sports jackets and $74 for long sleeves, it is no wonder Mandel is interested. It has been a terrific growth story in the past. Just over the last five years, the company has grown its EPS by over 30% per year. Last year it had some trouble, caused by supply chain problems, but these appear to be solved. Perhaps Lone Pine Capital expects it to continue growing at the pace it has exhibited over the past decade. Annual revenue growth over 10 years is nearly 50%!
Meanwhile, the stock trades at a rich P/E of 33.11x, a P/S of 4.39 and P/B of 7.52. It doesn't compare favorably to other clothing retail chains like the large and fast growing Inditex.
Source: Gurufocus
The balance sheet does look enviable, though, with $400 million in cash and no long term debt. The one caveat I have is that there is some hidden leverage being utilized through the store leases, so you aren't completely safe.