JB Global Capital on lululemon athletica inc.

The Lululemon thesis was based on a high-quality business trading below what its historical fundamentals appeared to justify, including a debt-free balance sheet, strong gross margins and unusually high operating margins. Since the initial investment, however, gross margin, operating margin and return on equity have deteriorated, demonstrating the limitations of relying too heavily on backward-looking financial performance. The business nevertheless retains a debt-free balance sheet with substantial cash and margins that remain above most apparel peers. A leadership transition and the founder's proxy fight introduced uncertainties that could not have been captured by the original financial model. The manager continues to hold roughly 9% of the portfolio and retains conviction in the business, but has reduced position-level confidence while waiting for the leadership situation to settle.