Editing of Research Project

Financial Accounting and Analysis Report

Lululemon Athletica Inc. vs. Calvin Klein (PVH)

Accounting and Business Decisions

INTRODUCTION

When making an investment, it is easy to be overcome by excitement and the love for a specific company and its deals. It is, however, very important to analyze and figure out the one that offers the best chance to invest using the money that one has earned working hard. The analysis of the company includes comparing it to other companies that have similar and almost similar profile, studying how the company has performed over the years and trying to predict what the future of the company holds. All this is a tough task that requires commitment and carefulness. This is by no means an exciting task for an investor to perform.

By use of numerical values, an investor can get the most important information about the company and its undertakings. The numerical values are taken from the financial statements so that they create the financial ratios. These financial ratios of a company are tools that enable the investor to analyze and compare the financial performance of the company and the impact that they have on the operations on the company. According to Basu (2019) the financial ratios of a company are part of four categories: profitability r return on investment, advantage, efficiency, and liquidity.

This report aims at analyzing the financial ratios of Lulu Lemon Company and the Calvin Klein Company in order to determine which of the companies provide a good avenue for an investor to put his or her money. It is important to note that financial ratios are very sensitive with time and therefore this report will only use data that is not more than five years old. Even after the analysis of the financial ratios, the investor should also be able to look into the past operations of the company, and the ability of the company to gain advantage over its competitors. The comparison between Lululemon and Calvin Klein is in itself a long standing competition after Lululemon sued Calvin Klein for allegedly infringing the design patents for its Astro yoga pants signature and design of the waist band (Rogers, 2012). However, the suit was later withdrawn.

Lululemon

Lululemon was founded by Chip Wilson in 1998 in British Columbia (Lululemon, 2017). Lululemon is a company that deals with athletic apparel for individuals with active lifestyles. It is specific to the yoga community. In fact, the company boasts of its uniqueness in the yoga apparel field. It is based in Vancouver, Canada, British Colombia and clothing stores around the world. The apparel company offers a line of clothes that include shorts, tops, fitness pants and other garments used for yoga and other physical fitness activities. The organization is a worldwide company that has achieved success and growth for since its inception to the economic world.

The company has its roots in British Colombia. Its founder, Denis “Chip” Wilson had spent two years in surf, snowboard, and skate business before founding it in the year 1998. After attending yoga sessions, Denis fell in love with the yoga sessions. However, he was unimpressed with the cotton clothing that was used for yoga. Wilson’s idea was that a person needed enough space for sweating and stretching while doing the exercises. His desire to change that grew so much that he created a studio for designing. Since it was in its inception stage, Wilson struggled to pay rent and decided to turn the studio into a yoga class during the night.

Wilson used the yoga instructors in his classes to get feedback and useful insights into his designs. The designer decided to name the company “Lululemon” after surveying 100 people. He fell in love with the three Ls in the name’s pronunciation and, controversially, how Japanese struggle to pronounce it. He opened the first store in Vancouver, British Colombia in 2000 with the intention of it being a community-gathering place for discussing topics exercise and dieting. The store, however, grew much quicker than expected and products became popular among the customers. Lululemon’s primary mission was to embrace a healthy and active lifestyle. Chip drew his inspiration from Ayn Rand, a philosopher, with the intent of “elevating the world from mediocrity to greatness.” Lululemon still tries to uphold this by, for example, giving store managers much control of the operations in their stores.

The company now focuses a lot on community involvement and local enthusiast’s interaction. The company encourages its stores to hold in-house yoga and self-defense classes often. The company does not offer discounts on its products but sells over 95 percent of the products. It sells its products much more expensive than its competitors do. The organization has seven core values: quality, product, balance, integrity, fun, entrepreneurship, and greatness. The controversial statements by its founder (for example about child labor in third world countries among others) have not deterred the company.

Despite the bad images that may have been tainted of them, the company focuses on its legacy; A legacy to the future generations. Its heritage is promoting healthy lifestyles through yoga tradition and physical fitness. The company has fought various accusations including being labeled as “cultish” and disrespecting customer privacy. The company has dealt with the accusations by rebuilding their reputations and adopting new leadership. Its ability to implement difficult decision to do the right things will help the company avoid ethical issues in future.

Calvin Klein

Calvin Klein is an American luxury company that deals with fashion. The company was established in 1968 by Calvin Klein. The company started as a coat shop in the York Hotel in the New York City. At first the collection was only a line of youthful, understated and coats and dresses. Later in September 1969, the company was named as the most forward-looking company even Klein himself appearing in the Vogue magazine as a result. By the early 1970s, Calvin Klein had added classic blazers, lingerie, and sportswear to the line of women collection. In the mid-70s Klein had created designer jeans and in the late 70s the company made attempts to set up its own fragrance and cosmetics but it withdrew from the cosmetics and fragrance after coming down with financial losses (Manlow, 2009).

In 1992, the company almost faced bankruptcy but later managed to regain its profitability and increase it through the late 90s. One of the major ways that the company made sure that they regained success is through investment in fragrance and underwear lines, and the CK sportswear line. During the mid-90s, the company also introduced a line of boxers for men called boxer briefs (Gell, 2010). In 2002, the company was sold to Phillips Van Heusen Corp (PVH)

Financial Comparison

The table below shows the snapshot of the compared retail competitors, Lululemon and Calvin Klein over a period of years. The comparison includes revenue, net income and working capital.

Table 1 (Numbers in Billion US $)

Source: (Macrotrends, 2019)

Financial Ratio Comparisons: Lululemon vs. Calvin Klein

In comparing the two companies, the ratios were analyzed in different dimensions to ensure that there was no factor that was missed. The current ratio and the quick ratios were both analyzed. In the current returns, Lululemon had a 2.33 value while Calvin Klein under PVH had 0.00. From this analysis, Lululemon is way safer because it has more than enough assets to pay off any current liabilities that they may have. On the other hand, Calvin Klein had 0.00 which means that they do not have enough assets and therefore it is risky to invest. Current Ratios

For the quick ratio, Lululemon had a 2.05 ratio while Calvin Klein had 0.75 ratios (Macrotrends, 2019). Comparing the two, Lululemon can easily pay of their current liabilities with most of their liquid assets while the value is lower when it comes to Calvin Klein, the value of Lululemon is over two times that of Calvin Klein. Therefore, the two companies are not easily comparable and Lululemon is way over Calvin Klein.

Quick Ratio Lululemon

Quick ratio PVH

Another ratio compared between the two companies is the Inventory turnover. Inventory turnover ratio can be defined as a ratio showing how many times a company's inventory is sold and replaced over a period. PVH inventory turnover ratio for the three months ending April 30, 2019 was 0.60. On the other hand, the Lululemon Athletica Inc. inventory turnover ratio for the three months ending April 30, 2019 was 0.81 (Macrotrends, 2019). These ratios mean that Lululemon sold more times than Calvin Klein did.

There was the debt ratio that was also used to analyze and compare the two companies; the debt ratio indicates the percentage of assets that are financed with debt. Lululemon Athletica Inc. debt/equity for the three months ending April 30, 2019 was 0.39 while PVH debt/equity for the three months ending April 30, 2019 was 0.74 (Macrotrends, 2019). From the ratios, the number of assets that the Calvin Klein Company had that were financed by debts was two times more than those that Lululemon had.

There were three ratios that were used to measure profitability. These ratios are the ratio of return on assets (ROA), the ratio of return on investment (ROI), Rates of return on equity (ROE). Return on equity can be defined as the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. The ROE of PVH was 11.43% while Lululemon Athletica Inc. ROE was 27.48% (Macrotrends, 2019). This means that Lululemon Athletica Inc. generates way more per the investment of shareholders than what Calvin Klein does.  Return on assets can be defined as an indicator of how profitable a company is relative to its total assets; Calculated by dividing a company's operating earnings by its total assets. The ROA of Lululemon Athletica Inc. was 25.54% while that of Calvin Klein was 5.37%. The other ratio, the Rate of return of investment (ROI) for Lululemon was 48.05% and that of the Calvin Klein (PVH) company was at 8.77% (Macrotrends, 2019). The ratios mean that the Lululemon Athletica Inc. has a better historical return on investment; an investment by an individual has a better chance of earning profits in Lululemon than in Calvin Klein.

Return on Equity Lululemon

Return on Equity PVH

PVH

There are other three ratios that were used to analyze the stock as an investment. The ratios are the price earnings ratio, the price to sales ratio and the price book ratio.  The price to earnings ratio is calculated by taking the latest closing price and dividing it by the most recent earnings per share (EPS) number (Macrotrends, 2019). The PE ratio is a simple way to assess whether a stock is over or under valued and is the most widely used valuation measure. The PE ratio for Lululemon was 46.52 while that of PVH was 9.56. The price to sales ratio for Lululemon was 6.91 while that of Calvin Klein was 0.73. The final ratio, price/book ratio, for Calvin Klein was 1.21 while Lululemon Athletica Inc., was 17.41 (Macrotrends, 2019).

Price Earnings Ratio

Price Sales Ratio

Table 2: Ratio Comparison between Lululemon and Calvin Klein

Source: (Macrotrends, 2019)

CONCLUSION

After the deep analyses of the two companies, it can be determined that it is safer to invest with Lululemon Athletica Inc. going ahead. Looking at both of the companies, they have both made a name for themselves in the industry shown in their analysis. However, it is evident than Lululemon has a better ratio overall. In fact, in almost all of the factors, Lululemon comes out on top as the one that is better. Impressively, Lululemon has an over 45 return to shares that are invested. An investor is almost certain that they have a better return of the shares that they invest. Also, the Lululemon Athletica Inc. has a lower debt ratio meaning than the one of Calvin Klein. Purring all the factors together, the two companies do not actually match; the Lululemon Athletica Inc. is on top and is way safer to invest with.

References