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Lululemon Is Oversold and a Value Buy Ahead of Earnings

The Canadian dollar reached four year lows during this reporting quarter against the U.S. Dollar. The Canadian dollar also declined against the Australian dollar (CAD/AUD ) sequentially, although the CAD/AUD remains above the same quarter year-over-year.

LULU Net Income (Quarterly) Chart

In the aggregate, all else being equal, if the company can execute, reported margins should hold or expand. If the company can maintain margins and same store sales, it then boils down to simple math. New store openings results in increasing revenue and profits and Lululemon continues to expand its store count.

The company is already trading at a forward price-to-earnings discount compared to Nike (NKE) and Under Armour (UA). After considering the balance sheets, growth rate, and cash flow, I think Lululemon ranks as the best out of all three.

Under Armour is growing rapidly, but you will pay full price for it. Under Armour's forward P/E ratio is almost 50 compared to 22 for Nike and less than 20 for Lululemon. Unlike Nike and Under Armour, Lululemon is debt-free.

LULU Shares Outstanding Chart

The problem for shareholders, and why short-sellers are pounding on the stock, is the number of shares outstanding is also increasing. More shares mean the pie gets divided into smaller pieces. The pie is growing, but not fast enough to offset the bulging number of shares allowed into the float.

The simple solution is twofold. Use the strong positive cash flow and buy back shares on the open market at a greater pace than issuing employee stock options. That's a no-brainer and there's no reason the company can't use $400 million of the over $700 million expected in the next report) in cash during the next 12 months to undiluted shareholders.

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