Shawn O'Malley and Daniel Mahncke analyze Lululemon, a premium active sportswear brand, noting its revenue growth, industry-leading margins, and high return on invested capital, contrasting these strengths with the stock's recent price decline. They explore Lululemon's history, its creation of the athleisure market, and its impressive margin profile, attributing it to pricing power and operating leverage. They discuss the company's ambitious growth plans, focusing on menswear and international expansion, particularly in China, while also addressing potential challenges such as increasing competition, the risk of losing brand exclusivity as it becomes more mainstream, and the impact of tariffs. They further examine Lululemon's direct-to-consumer strategy, its marketing approach, and the nuances of its brand strength, considering both bullish and bearish perspectives, and also evaluate the company's valuation, cash flow, and inventory management, culminating in a decision to add Lululemon to their portfolio with a 5% weighting.
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