Lululemon vs. Under Armour

I have usually bought stuff from Under Armor in the past, and recently looked into Lululemon, from where I bought a bag, for which I overpaid relative to a much, much higher quality SwissGear bag by Wenger ($120 vs. $100) with more room. For disclosure, I have no position in any of these, and have never had any. These are proprietary ideas. 

Under Armour: (Potential to be Long Here)

1. Topline by both apparel and footwear has decreased since 2018. In comparison to peers (Lululemon, Nike, Adidas) , clearly some price growth that can be pushed through, but this needs to be justified through optimal marketing spend / strategy   

2. In order for customers to be comfortable with the price increase, marketing $ have to be allocated prudently. Check out their ads on YouTube and while they’re okay-ish, they are just not near Nike’s standard. They need to sign exclusive deals with athletes and go global in their outreach with respect to the type of athletes they attract. Attracting Asian audiences is of utmost importance. SG&A doesn’t seem to be well utilized, as they are allocating a higher % of your topline to SG&A than your peers, but that doesn’t reflect in your topline. Maybe the key here is to run some joint promos with the next big thing that consumers favor: Tesla. 

3. Some product lines have to be discontinued for instance masks, but seems like everyone is selling face masks these days. Have no idea why they're selling silly face masks and that too for a high premium, I can get a box of masks for $5 dollars and it’s not really a fashionable item to have unless you are Batman or Bane and need to continuously recycling 

4. Operating margins are significantly lower than your peers’ but this can be attributed to the above reasons 

5. Board needs to be revamped, have no clue why half the people on its board also serve the company in an official capacity. The point of having a board is to get some outside intelligent view, not reiterate the same thing that management believes in 

6. Amongst all its peers, UnderArmour has the lowest % held by insider shares. Does this not tell you that the management is not as confident about the company’s growth prospects as its peers 

But on a relative valuation basis, stock is cheap and these problems are easily fixable with the right investor on board, so hence a buy. 

Lululemon (Most Likely A Short) 

1. Operations: 

Visited two of their stores in a major financial city. What a waste of real estate with so much space allocated to fitting rooms, can fit in one or two mini-convenience stores in that area. Also, providing hemming services with a significant turnaround time (relative to Levi & Strauss) and not accommodating non-Lululemon stuff. Under utilized staff and real estate. 

Unsure how much money they spend on putting these fancy educational labels on their garments, but I doubt many people are making purchasing decisions based on these tags. People decide on what fits well and their personal preference, not four / five point bullet points (who has the time to read that??)    

They conducted this global well being survey which was also very unnecessary. Why can’t a global consulting firm do this, and if they did hire one for this, what was the point of it anyways? They should be sticking to your core expertise (which is fast turnaround of inventory similar to Zara and H&M), not random work streams 

2. Acquisitions 

Acquisition of Mirror was a waste of capital. All one needs to do is put a video on YouTube, stream it to my TV using Google / Roku, and we're set. 450 million to pay for this is just horrendous, not to mention the price tag on the equipment ($1895 which represents a 26% increase in price yoy). As people RTO, this equipment will have 0 utility. And it doesn’t seem as if these guys are making much money off it from the financials (negligible or poor RoI). Gives you a sense of how poor their capital allocation policies are 

3. Financials 

Operating margins on company owned stores seem to have gone down massively from 2018 to 2020. I don’t know what exactly is going on, but the jump in revenue from 1.1 billion to 2.3 billion (from 2019 to 2020) for direct-to-consumer seems to be more of an accounting reclassification than anything else. It’s too big of a jump in one year when there wasn’t anything spectacular going on 

They don't disclose revenue by different product categories, but anecdotally leggings for women are usually their top-selling category while for men it is mixed. Lululemon's price-tags are at top of the shelf (relative to Nike and Under Armour), so limited room for further growth; and they are selling stuff that they are not known for (trousers and all), which other brands (Gap, Banana Republic, Zara, HM) clearly can beat them on by a huge margin  

4. Corporate governance 

Unless they're actively trying to meet some ESG requirements here, everyone on the board should be adding some value to a consumer products / retail business, and there seems to be some lack of depth here, meaning people, who don't have any relevant experience to the industry, are sitting on the board 

Lululemon is trading at a very high multiple relative to comps, all growth prospects have been fully baked in, this is a value trap. I would tread cautiously here 

Let me know if anyone has any different views on these.