Lululemon Athletica Inc., a multi-national athletic apparel company, specializes in accessories and clothing inspired by yoga. After reviewing the company’s most recent annual report, I have calculated and evaluated the firm’s sustainable growth rate (SGR) for the last 3 years.
Lululemon’s sustainable growth rate over the last 3 years can be calculated using the return on equity and the dividend payout ratio (DPR) taken together. Lululemon’s ROE was 23%, 31%, and 32% for 2018, 2019, 2020. DPRs for the same period were 20, 8.9%, and 22.1%. SGR =
SGR = ROE – DPR
2018: 23.4% – 20.8% = 2.6% 2019: 31.5% – 21.9% = 9.6% 2020: 32.7% – 22.1% = 10.6%
Therefore, Lululemon’s sustainable growth rate for the last 3 years has been around 10%.
If a firm grows at an unsustainable rate, it can lead to financial problems, including over-extension, difficulty financing future growth and diluted earnings per share. If a company’s growth rate exceeds the sustainable rate, they may be forced to use debt financing in order to pay for the excess growth. This is risky and can cause financial trouble. However, companies that grow at lower rates than the sustainable rate may have to pay stockholders more in share buybacks, or higher dividends.
In Lululemon’s case, it has grown at a rate above the sustainable rate, which is an indication of its strong performance and efficient use of resources. Lululemon has funded its growth using a mix of equity financing and retained earnings, which has allowed it to maintain a solid balance sheet. In addition, stockholders have been given increased dividends as well as share buybacks.