Lululemon Athletica Inc (NASDAQ:LULU) Passes the 'Caviar Cruise' Quality Investing Screen

For investors aiming to assemble a portfolio of lasting, high-achieving companies, the quality investing philosophy offers a useful framework. This method centers on finding businesses with durable competitive strengths, high profitability, and sound financial condition, with the plan of owning them for many years. The "Caviar Cruise" stock screen puts this philosophy into practice by selecting for companies that show better-than-average historical growth, outstanding returns on capital, and high-grade earnings. One company that regularly appears from this strict screening process is Lululemon Athletica Inc (NASDAQ:LULU).

Matching the Central Rules for Quality

The Caviar Cruise screen uses several measurable filters to find possible quality investments. Lululemon's financial statements show a firm match with these central rules, which are made to find companies with a confirmed history and effective operations.

• Continued Growth: The screen calls for a minimum 5% compound annual growth rate (CAGR) for both revenue and EBIT (earnings before interest and taxes) over five years. Lululemon greatly surpasses this, with a revenue CAGR of 5.77% and a notable EBIT CAGR of 23.02%. Also, a central rule of the screen is that EBIT growth should be faster than revenue growth, pointing to better operational effectiveness and pricing ability. Lululemon's large lead in EBIT growth plainly satisfies this important rule.
• Outstanding Capital Effectiveness: For quality investors, how effectively a company produces profits from its invested capital is very important. The screen asks for a Return on Invested Capital (excluding cash, goodwill, and intangibles) above 15%. Lululemon's ROICexgc of 38.25% is not only more than twice the minimum but puts it in the highest group of its industry, showing a very effective and profitable business model.
• Sound Financial Condition and Earnings Grade: The method stresses financial strength by requiring a Debt-to-Free Cash Flow ratio below 5, with smaller numbers being better. Lululemon does very well here with a ratio of 0.0, showing a balance sheet with no net debt. Also, the screen searches for "high-grade" profits by demanding that, on average, at least 75% of net income becomes free cash flow over five years. Lululemon's Profit Quality score of 86.23% shows that its accounting profits are firmly supported by real cash generation.

A Broad Fundamental Examination

An inspection of Lululemon's detailed fundamental report supports the results from the screen. The company receives a firm overall fundamental rating of 7 out of 10, with especially high marks in profitability (8) and financial condition (9).

• Profitability Leader: Lululemon's margins are a notable feature. It has a profit margin of 16.38% and an operating margin of 22.92%, each beating over 93% of similar companies in the Textiles, Apparel & Luxury Goods industry. Its return on equity of 40.70% further confirms its effectiveness.
• Very Strong Balance Sheet: The condition score of 9 is supported by a debt-free position, a firm Altman-Z score showing no bankruptcy risk, and good liquidity ratios. This financial strength provides steadiness and options to manage economic changes.
• Fair Valuation Compared to Peers: While quality often has a higher price, Lululemon's valuation seems fair. Its Price-to-Earnings ratio of 12.44 is lower than 80% of its industry peers and is much lower than the current S&P 500 average. The report states that its high profitability could support a higher multiple, implying the market may not completely account for its quality traits.

Fit with Non-Quantitative Quality Ideas

Beyond the figures, Lululemon shows many of the less measurable features quality investors value. The company has created a strong brand that supports premium pricing and builds customer devotion, a clear competitive strength. Its concentration on technical athletic apparel fits with the lasting movement toward health and fitness. The business model is fairly simple for investors to grasp, and its worldwide growth offers a multi-year growth path.

Locating Other Quality Possibilities

Lululemon Athletica presents a useful example of a company that meets a systematic quality investing screen while also showing the signs of a strong brand and a clear growth path. For investors wanting to use this method to find other possible candidates, the Caviar Cruise screen is a helpful beginning. You can investigate and adjust the screen yourself here.

---

Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer to buy or sell any security. Investing involves risk, including the potential loss of principal. You should conduct your own research and consult with a qualified financial advisor before making any investment decisions.