At 26x forward EPS, Lululemon Athletica Inc. (LULU) remains one of the most expensive stocks among peers - even after today's plunge of over 8% (as of the time of this writing). Although the company met its Q3 targets, as outlined in the September presentation: (Source: Stifel Nicolaus September 2015 Investor Presentation) It also lowered its FY 2015 EPS guidance from an average of $1.90 per share to an average of $1.82 per share, as per the latest press release. Investors in growth stocks closely monitor quarterly results and vote with their dollars. Now, with this forecast, the stock is currently trading at over 26x expected earnings. I find this remarkable high not only on a relative basis but also on a growth-based level: the current PEG ratio is at 1.80, as per the average three-year EPS growth rate of 14.5%. Keep in mind that a reasonable PEG ratio is 1.0 plus-minus 10%. Also remember that the relatively high EPS growth rate is due to a remarkable growth of earnings in fiscal 2013 (EPS increased from $1.26 to $1.85 in one year). After that, EPS remained in the $1.80 - $1.90 range. With the current earnings expectation in the range between $1.80 - $1.84 per share, the growth is actually negative. I am not sure that growth investors will applaud this. Besides EPS, key margins are also down which is even more troublesome: (Source: Stifel Nicolaus September 2015 Investor Presentation) There is also no updated guidance on the gross profit margin in the latest press release. The fact that the company cannot forecast its margins for the next quarter actually bothers me. We all know that cash is king. Let us scrutinize the latest cash flow statement and compare the figures to the historical ones: (Source: 10-Q Report) So, the first thing that I noticed in the report above is that cash from operations is down by 74% on a year-over-year basis. What caused such terrible results? Let us go over a few key points: - Net Income is up which is nice. Adjusted net income (after adding up D&A) is up even more: by 36%. - Stock-based compensation has almost doubled - to $6M. I wonder how this computes given that EPS has been stagnant for about three years. Not sure the management deserves it with these results. - The company invested over $74M into inventories. A longer historical analysis would show whether this a trend or not. If it is, the company will have to reinvest most of its profits into inventories (i.e. working capital) as the business grows, limiting the amount of cash that can be distributed to the company's shareholders. This is a very important factor to consider. The good news is that some of the inventory growth is offset by the so-called "accrued inventory liabilities", which, essentially, are accounts payable. Increases in liabilities, especially in accounts payable, positively contribute to cash flows as they either add cash to the bank account or save cash for the period. - On the other hand, the company has been cutting its accounts payable balances for at least a year and a half, as the data show. This uses up cash. Overall, what matters is not the actual figures on the cash flow statement but the dynamics. The key question is: will the company need to constantly expand its net working capital as revenues increase or not? If the answer is affirmative, this is bad for the company's valuation because growth in working capital is detrimental to free cash flows, which are used as the base for valuation. Now it is time to look at the rest of the statement: (Source: 10-Q Report) So, what do we see in the Investing and Financing activities? - CapEx is up. This understandable as the business is growing. - The company has repurchased over $80M of own stock: this is 46% more than a year before. Good thing? Not really. Remember that the company only produced $32M in operating cash flows this year. This is not sufficient even to cover CapEx, let along repurchases. Basically, what we can conclude is that the company is simply returning cash to shareholders. This is not bad for the company given that the stock is down: "You bought the stock a year or two ago? Good for you - here is your cash back. We do not know what to do with all this excess cash". - The cash balance is down by over $180M since the last year. Technically, the company does not know what to do with all the cash it raised over the years. The business is clearly not growing fast enough to profitably employ the cash. Hence, the company is returning it via buybacks. So, why did the company raise so much cash in the first place? Greed? Methinks. I am going to conclude my analysis of Lululemon Athletica Inc. with one word, which best describes my opinion on its entire business: inefficient.