Analysing Lulu IPO prospectus using AI tools

Latest edition of One More Thing in AI Newsletter.

Date: 01-Nov-2024

Hey AI enthusiast,

Welcome to the latest edition of the One More Thing in AI newsletter!

Lulu, a Middle East Retailer, has floated an IPO- what do our favorite AI chatbots say about investing in the company?

I decided to ask my AI chatbot for advice.

Best regards,

Renjit Philip

In this edition:

Should I invest in Lulu Retail Holdings IPO?

Lulu Retail Holdings, which owns one of the largest hypermarket chains in the Middle East, is set to raise up to 5.27 billion dirhams ($1.43 billion) through its initial public offering (IPO). This IPO will be the largest in the United Arab Emirates this year. The conglomerate runs over 240 stores across the Gulf Cooperation Council (GCC) region and will be listed on the Abu Dhabi Securities Exchange on November 14.

One morning, I felt too lazy to do the hard work of reading the huge prospectus and crunching numbers to help me decide if I should invest in Lulu’s IPO or not. So I decided to ask ChatGPT’s 4o model.

This is not financial advice. This blog post is written for informational and educational purposes. I have not verified the output from 4o, so expect inaccuracies and hallucinations. My idea is twofold:

1) To arm you with prompts that you can use to analyze a future prospectus (or prospectii?) that you may encounter.

2) To give you an idea of the methodology to analyze an IPO prospectus. Following the steps that GPT 4o uses below (but you have to do it with your trusty calculator or spreadsheet!). There are several other methods that a hot-shot investment banker would use; I have not covered everything here.

Here is how I went about it. I uploaded Lulu’s IPO prospectus to Chat GPT o4 ( I have a paid version).

Here is the prompt that I used:

1. **Financial Analysis Prompt**:
   - “Using the detailed information provided in Lulu's financial filing, conduct an investment suitability analysis. Focus on:
     1. Financial Health: Evaluate revenue growth, profitability, and cash flow stability.
     2. Platform Metrics: Assess user base size and engagement levels.
     3. Brand Value: Analyze Lulu’s brand strength and market positioning.
     4. Risk Profile: Identify risks related to user base changes, profitability issues, regulatory challenges, and market fluctuations.
     5. Monetization Potential: Review Lulu's revenue generation and growth strategies.
     6. Compliance: Examine legal and regulatory measures in place to mitigate risks.
     7. Governance: Analyze stock structure and voting controls.
     8. Market Outlook: Evaluate Lulu’s market opportunity, competitive edge, data use, and IP strength for investor insights.”

2. **Financial Ratios Prompt**:
   - “Using the S1 document, provide a comprehensive analysis of Lulu's financial ratios, covering profitability, liquidity, solvency, and leverage ratios.”

3. **International Retailer Comparison Prompt**:
   - “Compare Lulu’s financial ratios to international retailers like Walmart, Tesco, and Carrefour. Highlight similarities and differences to assess Lulu’s competitive position.”

4. **Indicative Share Price Valuation Prompt**:
   - “Analyze whether Lulu’s indicative IPO share price aligns with its international retail peers. Assess valuation ratios, including P/E, P/S, and EV/EBITDA, to determine if Lulu's price point is reasonable for investors.”

5. **Investment Decision Prompt**:
   - “With $100,000 to invest in retail, and based on the above analysis, which retailer—Lulu, Walmart, or Carrefour—would be the best choice? Provide a recommendation considering each company’s financials, valuation, growth potential, and risks.”

Here is what I got from Chat GPT o4:

Based on the financial document, here is a detailed analysis of Lulu's suitability for investment:

 1. Financial Performance

Lulu has shown steady growth across various metrics. Key performance indicators include:

- Revenue: For the six months ending June 2024, Lulu's segment revenue across major geographical markets (UAE, Qatar, KSA, Oman, Kuwait) consistently increased, totaling approximately USD 1.93 billion.

- Profitability: Lulu's adjusted EBITDA showed robust segment profitability across regions, particularly in UAE and KSA, with a strong EBITDA margin suggesting operational efficiency.

- Cash Flow: Although specific cash flow statements were not detailed, the EBITDA and segment revenue growth indicate positive cash flows, which are essential for stable business expansion.

 2. User Base and Engagement

Lulu’s Happiness Programme loyalty initiative has been a key driver of engagement. As of August 2024:

- Customer Loyalty: 70% of UAE sales and 66% in Qatar were generated by registered loyalty members. The higher average basket size among loyalty members indicates increased user engagement and spending, driving revenue stability and enhanced profitability.

- Daily Shopper Volume: Increased from 565,078 in 2022 to 657,749 by mid-2024, reflecting Lulu's stores' popularity and consumer preference.

Extract from Lulu IPO

 3. Brand Strength

Lulu is well-established as a trusted retailer across the GCC:

- Brand Investments: Lulu has invested heavily in multi-channel marketing campaigns, which include traditional media, social channels, and in-store promotions. This extensive reach enhances brand recognition.

- Awards and Recognition: Lulu's commitment to service quality and customer satisfaction has earned it notable awards like the Sheikh Khalifa Excellence Award and the Dubai Quality Award, reinforcing its strong brand position.

 4. Risk Factors

Key risks identified include:

- Consumer Behavior and Spending: Retail sales are highly sensitive to consumer trends and are influenced by economic conditions beyond Lulu's control. Lulu’s revenue could fluctuate due to consumer spending shifts toward e-commerce or alternative retail channels.

- Supply Chain: Lulu depends on a robust supply chain, sourcing from over 85 countries. Disruptions here could impact product availability and quality.

- Regulatory and Legal: Lulu is exposed to regulatory risks, significantly as it expands across regions. Unfavorable legal outcomes could incur significant costs.

 5. Monetization Strategy

Lulu's monetization levers include:

- Private Label Products: Private label items account for 29.3% of retail revenue as of June 2024, and these products help Lulu differentiate itself from competitors and improve margins.

- Customer Loyalty Programs: By targeting repeat customers through loyalty programs, Lulu enhances revenue per user, providing a solid base for continued revenue growth.

 6. Legal and Regulatory Compliance

- Supplier Audits: Lulu actively audits suppliers to ensure quality and compliance. It provides corrective recommendations if necessary, underscoring a proactive approach to regulatory and quality compliance.

- Loyalty Program Compliance: Lulu's expansion of the Happiness Programme across regions aligns with local regulations, allowing it to build a compliant and standardized program.

 7. Corporate Governance Structure

Lulu’s governance includes:

- Multi-Class Structure: Voting rights and governance control are distributed to align shareholder interests, but potential dilution or reduced voting control for new investors should be considered.

- ADQ Partnership: The involvement of ADQ, a government entity, adds a layer of strategic support and stability, which may be favorable for long-term investors.

 8. Market Potential

Lulu benefits from a large and growing addressable market, with supportive macroeconomic conditions in the GCC, including:

- Projected Growth: The grocery retail market in the UAE and KSA is expected to reach USD 26 billion and USD 48 billion, respectively, by 2028. Lulu’s market penetration and geographic expansion strategies are well-positioned to capitalize on these trends.

- Digital and E-commerce Expansion: Partnerships with Amazon and regional delivery platforms enhance Lulu’s reach among digitally savvy consumers, potentially mitigating risks of declining footfall in physical stores.

In summary, Lulu demonstrates strong financial health, a solid user base, and effective monetization strategies. However, regulatory, market, and operational risks warrant close monitoring. The company's large market potential, competitive advantages, and strategic partnerships position it well for continued growth in the GCC, making it an attractive investment with managed risk exposure.

Lulu demonstrates robust profitability, good liquidity, and efficient inventory management. However, high leverage and modest asset returns suggest monitoring financial structure improvements. For investors, strong ROE and interest coverage ratio are positives, balanced by the need to manage debt reliance carefully.

I took snapshots of ChatGPT produced for the section below because the text was not copyable.

ChatGPT got a few ratios wrong, so I recommend uploading the prospectus again and using this simple prompt: ”Double check all your calculations and see if there is any error”.

Lulu displays strong profitability and operational efficiency with the corrected current liabilities but shows liquidity constraints and high financial leverage. The current and quick ratios indicate limited short-term liquidity, suggesting reliance on financing to cover liabilities. However, its ROE remains robust, making it attractive to equity investors, albeit with high leverage risks.

Here's a comparison of Lulu’s financial ratios against industry averages and international retailers, such as Walmart, Tesco, and Carrefour, which provides insights into Lulu’s competitive position.

 1. Profitability Ratios

- Gross Profit Margin:

  - Lulu: 23%

  - Industry Average: ~24% for large retailers

  - Walmart: 25%

  - Tesco: 30%

  - Carrefour: 21%

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Lulu’s gross profit margin aligns closely with the industry average and Carrefour's, indicating it manages its direct costs efficiently. Tesco’s higher margin reflects its strong pricing strategy and brand positioning in premium markets.

- Net Profit Margin:

  - Lulu: 3%

  - Industry Average: ~2-4% for international retailers

  - Walmart: 2.3%

  - Tesco: 2.2%

  - Carrefour: 3.5%

Lulu’s net profit margin is higher than that of major retailers, showing effective cost management beyond direct costs. Carrefour’s similar net margin suggests a comparable operational efficiency.

- Return on Assets (ROA):

  - Lulu: 2.8%

  - Industry Average: ~3-4% for retailers

  - Walmart: 5.2%

  - Tesco: 3.1%

  - Carrefour: 2.9%

Lulu’s ROA is slightly lower than Walmart and Tesco but in line with Carrefour. This indicates that Lulu’s asset productivity is reasonable, but there is room for enhancing asset efficiency, especially compared to Walmart.

- Return on Equity (ROE):

  - Lulu: 28.9%

  - Industry Average: ~15-20%

  - Walmart: 17.9%

  - Tesco: 12%

  - Carrefour: 10.2%

Lulu’s ROE is significantly higher than that of its international counterparts, reflecting a high return on shareholder equity. This strong ROE might attract equity investors, although it’s partly due to high leverage.

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 2. Liquidity Ratios

- Current Ratio:

  - Lulu: 2.0

  - Industry Average: 1.0-1.2

  - Walmart: 0.8

  - Tesco: 0.6

  - Carrefour: 1.1

Lulu’s current ratio is higher than typical industry standards, suggesting strong liquidity and short-term financial health. Most international retailers keep lower ratios due to efficient cash management practices and shorter cash conversion cycles.

- Quick Ratio:

  - Lulu: 1.4

  - Industry Average: ~0.5-1.0

  - Walmart: 0.2

  - Tesco: 0.5

  - Carrefour: 0.6

Lulu’s quick ratio is substantially higher than its global peers, reflecting a more significant cash buffer after inventory. While this strengthens Lulu’s liquidity profile, it also signals potential inefficiencies in cash deployment or a lower reliance on just-in-time inventory management.

 3. Solvency Ratios

- Debt to Equity Ratio:

  - Lulu: 9.4

  - Industry Average: ~1.5-2.5

  - Walmart: 1.5

  - Tesco: 1.0

  - Carrefour: 1.1

Lulu’s debt-to-equity ratio is significantly higher, highlighting a strong dependence on debt financing. International retailers like Walmart and Tesco maintain lower debt reliance, balancing debt to equity for long-term financial stability.

- Interest Coverage Ratio:

  - Lulu: 2.4

  - Industry Average: ~6-10

  - Walmart: 10.6

  - Tesco: 4.9

  - Carrefour: 3.1

Lulu’s interest coverage is lower than the international average, indicating that debt costs are more burdensome. This raises a risk factor, as higher debt service limits flexibility for reinvestment or dealing with unforeseen financial stress.

 4. Efficiency Ratios

- Asset Turnover Ratio:

  - Lulu: 0.91

  - Industry Average: ~1.5

  - Walmart: 2.3

  - Tesco: 1.4

  - Carrefour: 1.1

 Lulu’s asset turnover is lower than its peers, suggesting that it could further optimize its assets to drive revenue. Walmart’s high asset turnover reflects the efficient use of assets, a benchmark for achieving operational efficiency in the retail sector.

- Inventory Turnover Ratio:

  - Lulu: 4.0

  - Industry Average: ~6-8 for retailers

  - Walmart: 8.7

  - Tesco: 5.1

  - Carrefour: 4.6

Lulu’s inventory turnover is lower than that of Walmart and Tesco, suggesting there may be an opportunity for more rapid inventory movement to reduce holding costs. However, it aligns reasonably well with Carrefour, suggesting a similar market strategy or demand pattern.

 5. Leverage Ratios

- Financial Leverage Ratio:

  - Lulu: 10.4

  - Industry Average: ~2.0-3.0

  - Walmart: 1.9

  - Tesco: 2.2

  - Carrefour: 2.1

Lulu’s financial leverage is notably higher, implying increased financial risk due to debt reliance. This aggressive leverage contrasts with international retailers' more conservative financial strategies, which tend to maintain balanced capital structures.

 Summary

Compared to global retailers, Lulu is profitable, with strong liquidity and a high ROE, but it also has significant leverage and lower efficiency in asset and inventory utilization. These factors indicate solid growth potential but with higher financial risks.

 Lulu Retail Holdings has set its IPO price range between AED 1.94 and AED 2.04 per share, aiming to raise approximately $1.43 billion, with an implied market capitalization between $5.46 billion and $5.74 billion.  

To assess if this valuation aligns with international peers, we compare key financial metrics and valuation ratios:

 1. Price-to-Earnings (P/E) Ratio:

- Lulu: Assuming a net profit of $221.77 million in 2023 and a market cap of $5.74 billion, the P/E ratio is approximately 25.9.

- International Peers:

  - Walmart: P/E ratio of 34.67. 3

  - Carrefour: P/E ratio of 10.23. 9

2. Price-to-Sales (P/S) Ratio:

 - Lulu: With revenue of $7.28 billion in 2023, the P/S ratio is approximately 0.79.

 - International Peers:

  - Walmart: P/S ratio of 0.79. 19

  - Carrefour: P/S ratio of 0.23. 11

3. Enterprise Value-to-EBITDA (EV/EBITDA) Ratio:

 - Lulu: Assuming an EBITDA of $391 million in the first half of 2024, annualized to $782 million, and an enterprise value (EV) of approximately $7.5 billion (market cap plus net debt), the EV/EBITDA ratio is about 9.6.

 - International Peers:

  - Walmart: EV/EBITDA ratio of 11.

  - Carrefour: EV/EBITDA ratio of 5.

 Conclusion:

Lulu's indicative valuation metrics are generally in line with international peers, with a P/E ratio below Walmart's but above Carrefour's and a P/S ratio comparable to Walmart's. The EV/EBITDA ratio is between Walmart and Carrefour, suggesting a balanced valuation. When evaluating its IPO valuation, investors should consider Lulu's growth prospects, market position, and regional economic factors.

Investing $100,000 in the retail sector requires a thorough analysis of each company's financial health, growth prospects, and market positioning. Here's a comparative assessment of Lulu Retail Holdings, Walmart, and Carrefour to guide your decision:

1. Financial Performance:

 - Lulu Retail Holdings: In 2023, Lulu reported revenues of $7.28 billion and a net profit of $221.77 million, resulting in a net profit margin of approximately 3%. The company has shown consistent revenue growth and maintains strong profitability metrics.

 - Walmart: For the fiscal year ending January 2024, Walmart achieved revenues of $665.04 billion and a net income of $15.55 billion, yielding a net profit margin of about 2.3%. Walmart's extensive global presence and diversified operations contribute to its robust financial standing.

 - Carrefour: In the first half of 2024, Carrefour reported sales of €44.86 billion and a recurring operating income of €743 million, indicating a net profit margin of approximately 1.7%. The company has a strong presence in Europe and Latin America, with ongoing efforts to enhance profitability.

 2. Valuation Metrics:

 - Lulu Retail Holdings: With an IPO price range of AED 1.94 to AED 2.04 per share, Lulu's implied market capitalization is between $5.46 billion and $5.74 billion. This results in a Price-to-Earnings (P/E) ratio of approximately 25.9, which is competitive within the retail sector.

- Walmart: Currently trading at around $81.39 per share, Walmart's P/E ratio stands at approximately 42.99, reflecting its strong market position and consistent performance.

- Carrefour: Trading at approximately €16.50 per share, Carrefour's P/E ratio is around 10.23, indicating a more conservative valuation than its peers.

 3. Growth Prospects:

 - Lulu Retail Holdings: Lulu is expanding its footprint across the GCC region, with plans to open new stores and enhance its e-commerce platform. The company's focus on the rapidly growing Middle Eastern market positions it well for future growth.

- Walmart: Walmart continues to invest in digital transformation, including e-commerce and automation, to drive future growth. Its global presence and diversified operations provide a stable foundation for expansion.

- Carrefour: Carrefour is focusing on cost savings and strategic price cuts to regain market share, particularly in France and Brazil. The company is also investing in digital initiatives to enhance its competitive position.

4. Risk Factors:

- Lulu Retail Holdings: As a new public entity, Lulu may face market volatility and regulatory risks associated with its expansion plans. However, its strong brand and market position in the GCC region mitigate some of these risks.

 - Walmart: Walmart faces challenges related to global economic conditions, competition from e-commerce giants, and regulatory scrutiny in various markets. Its diversified operations help mitigate these risks.

 - Carrefour: Carrefour's performance is influenced by economic conditions in Europe and Latin America and competition from other retailers. The company's ongoing restructuring efforts aim to address these challenges.

 Recommendation:

 Considering the above factors:

 - Lulu Retail Holdings: Investing in Lulu offers exposure to the growing Middle Eastern retail market. The company's strong financial performance and expansion plans present significant growth potential. However, as a recent IPO, it may experience higher volatility.

 - Walmart: Walmart provides stability and consistent returns, supported by its global presence and diversified operations. Its ongoing investments in digital transformation position it well for future growth.

 - Carrefour: Carrefour offers a more conservative investment with a lower valuation. The company's restructuring efforts and focus on key markets present potential for improvement, but it may face challenges in achieving significant growth.

 Conclusion:

 If you seek growth potential and are comfortable with higher volatility, investing in Lulu Retail Holdings could be advantageous, given its expansion in the GCC region and strong financial performance. For a more stable investment with consistent returns, Walmart is a solid choice, benefiting from its global presence and ongoing digital initiatives. Carrefour may appeal to investors looking for a value investment with the potential for gradual improvement.

Note: It's essential to conduct thorough due diligence and consider your investment objectives and risk tolerance before making any investment decisions.

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