Agreed. FY27 FCF estimates are c. 1.5bn. That's 23x FCF. So likely fairly valued. The FCF estimates from FY24 to FY27 are largely similar. For the bulls this has to move upward to price the stock in the 350-400 USD range.
In theory, if a company doesn't grow, the capex would be equal to the D&A, so that the existing assets are being replaced. If you notice, the starting point of my model is the operating profit (EBIT). Instead of adding D&A, and then subtracting capex to maintain the level of existing assets, I don't subtract the D&A in the first place. So, for a business that's stable over time, the capex required is covered.
The next part is all about a business that is growing. Based on the historical data, a so-called "Sales/capital ratio" can be calculated. This answers the question: How much capital is required, to support $1 in sales. In the case of Lululemon, that's close to 2.5. So, if the sales grow by $2,500, Ulta needs to invest $1,000 to support this. It is not only in long-term assets, but also in working capital. This additional investment is the "Reinvestment" line of the model.
I hope this makes sense. If you have more questions, please let me know.
A great stock. A great review.
Glad you enjoyed it Dan!
Agreed. FY27 FCF estimates are c. 1.5bn. That's 23x FCF. So likely fairly valued. The FCF estimates from FY24 to FY27 are largely similar. For the bulls this has to move upward to price the stock in the 350-400 USD range.
Great. Easily written Review. Makes fun reading your reviews!
Great stuff Kostadin! Why are you not adding back D&A and subtracting changes in NWC to NOPAT?
Glad you enjoyed it! Here's my rationale:
In theory, if a company doesn't grow, the capex would be equal to the D&A, so that the existing assets are being replaced. If you notice, the starting point of my model is the operating profit (EBIT). Instead of adding D&A, and then subtracting capex to maintain the level of existing assets, I don't subtract the D&A in the first place. So, for a business that's stable over time, the capex required is covered.
The next part is all about a business that is growing. Based on the historical data, a so-called "Sales/capital ratio" can be calculated. This answers the question: How much capital is required, to support $1 in sales. In the case of Lululemon, that's close to 2.5. So, if the sales grow by $2,500, Ulta needs to invest $1,000 to support this. It is not only in long-term assets, but also in working capital. This additional investment is the "Reinvestment" line of the model.
I hope this makes sense. If you have more questions, please let me know.
So basically your reinvestment line are your assumptions for (growth) capex and changes in NWC required for the business to grow.
It actually makes it more intuitive for people to undersand, specially for predictable growth patterns.
Thanks for taking the time.
Exactly. My pleasure!
Thank you for the review. I find this company really expensive at the moment, not only the stock but their products also.