Happy Friday!

📝 Focus

• Yogawear IS an Experience (LULU)

📊 In the Markets

• Inline Inflation

• Dollar General and Consumption

• Cybersecurity

• UBS has Negative Goodwill

📖 MoneyFitt Explains

🎓 Profit Margins (Net? Gross!)

📝 Focus

Yogawear IS the Experience (LULU)

Downward Dog, Upward Profits! Canadian yogawear juggernaut Lululemon shares did dip along with other sportswear retailers and makers last week as competitor results rolled in, showing weak spending on goods (with an increase in theft) as consumers continued their swift post-pandemic pivot to "experiences".

But LULU bucked the trend with its own results, which showed 11% growth in the North American business and China sales rebounding by 61% on post-pandemic curb demand (bucking another bleak trend on the other side of the world.)

The company once again raised its annual revenue and earnings per share forecasts a little bit for the financial year ending January 2024, putting it on a current-year forecast multiple of about 31 times (meaning the P/E Ratio or PER.) Among the main competitors are Sweaty Betty, Nike, Adidas, Under Armour and Gymshark.

Unlike many of its sportswear peers, Lululemon's strategy is to avoid heavy discounting by introducing new products and maintaining high profit margins🎓. Maybe yoga (and the bags and workout gear you absolutely definitely need for it) is the experience, and at Lululemon’s high price points, they get a bit of a luxury product tailwind at the same time.

..... ▷ Lululemon’s Direct to Consumer (DTC) business refers to its online channels and is reported separately from sales through its physical retail stores. DTC revenue has been a significant growth driver for Lululemon in recent years.

In the latest results, in the second quarter of fiscal 2023, Lululemon reported DTC net revenue increased by 15%, representing 40% of total net revenue but a smaller part of overall sales (42% in the year-ago period.) Lululemon’s balanced omnichannel options are an important element of its performance, with the performance of digital and physical sales see-sawing between them.

..... ▷ The DTC channel is a key element of LULU's "Power of Three" strategy, originally introduced in 2019 as a growth five-year plan. The three pillars of this strategy were to drive product innovation, create integrated omnichannel guest experiences and expand deeper in key markets around the world. The ambitious growth strategy included plans to double men’s and digital revenues and to quadruple international revenues.

In 2022, having hit its 2023 revenue targets in 2021, Lululemon announced the weirdly-named "Power of Three x2" with the "x2" signifying the company's goal to double the business over the following five years, i.e. to double 2021 results by 2026, from $6.25bn to $12.5bn. After raising their guidance to $9.5bn for this year (to January 2024), they're just over halfway there.

..... ▷ Current CEO Calvin McDonald has said that he wants Lululemon to be "the most inclusive company in the world". Progress from back in 2013, when founder Chip Wilson was forced to resign as chairman, having sparked a public backlash after saying the stretchy leggings were not made for women “without a thigh gap” and that “Frankly some women’s bodies just don’t actually work for [the pants].”

This year, the company released its second annual Global Wellbeing Report, advocating for holistic wellbeing across physical, mental and social dimensions. ("Lack of money" was a barrier to well-being for 47% of the 10,000 respondents.)

Actionable Steps Towards Financial Freedom

📊 In the Markets

Inflation inline: The S&P 500 dipped while the Nasdaq rose after US inflation on the PCE measure came in inline with estimates, suggesting a potential Fed pause in September (which starts today!), leading Nasdaq to a 4-week high. The PCE index, the Fed's favoured inflation gauge, reported a 3.3% annual increase in July, and the Core PCE, excluding volatile items, rose 4.2%, both inline with expectations. Investors now await non-farm payrolls data on Friday.

Consumer spending increased by 0.8% in July, the most in six months and faster than the 0.7% expected, as Americans bought more and more goods and services... but only by drawing down excess savings accumulated during the COVID-19 pandemic, suggesting that this strength may be unsustainable since those savings are pretty much down to nothing.

..... ▷ Dollar General, a leading US discount retailer, lowered its full-year guidance for the second consecutive quarter due to weak consumer spending and a decline in store traffic, with earnings per share expected to decline by 22-34%, miles worse than previous guidance that suggested sales could decline by up to 8%. The stock dropped 12% on Thursday, almost exactly what rival Dollar Tree dropped the same day last week, and keeping pressure on the sector.

..... ▷ Cybersecurity AI play SentinelOne boosted annual revenue forecasts due to strong demand as economic concerns ease, though the company posted a loss of 8 cents per share compared to expectations of a 14 cent per share loss. A similar upbeat tone was seen by much larger peer CrowdStrike the day before and which rose 9% on Thursday.

Negative Goodwill to UBS

UBS achieved the highest quarterly profit ever earned by any bank in the world when it recorded a $29bn due to Credit Suisse takeover. It’s basically just an accounting gain that UBS has made on the difference between what it paid for Credit Suisse and the target’s net asset value. Without the intricate bank-geek details, the profit does boost its capital by enough to support the bigger balance sheet as a result of the deeply discounted takeover that was forced through what seemed like 100 years ago. (It was in March this year.) Shares rose 6%, taking it to a 40% gain since agreeing to the takeover.

..... ▷ Excluding the accounting gain, UBS recorded a decent but hardly record-breaking $1.1bn pre-tax profit. Despite being forced through by the Swiss authorities, the merger faces local political resistance as the Swiss bank plans to absorb Credit Suisse's domestic business (as opposed to the global wealth and investment banking parts) rather than spin it off, which will lead to 3,000 job cuts in Switzerland alone... roughly one in 12 Swiss jobs.

Cuts across the firm are even more brutal than previously expected, with the latest figure of over $10bn in cost-savings by end of 2026 compared to an earlier estimate of $8bn by 2027. (8,000 Credit Suisse employees already "left" in the first half of the year.)

But since UBS declined a Swiss government backstop originally offered for losses it might unexpectedly run into in the Credit Suisse books (actually a Credit Suisse speciality), the leverage that politicians have (heading into an election year) is basically zero.