Question

Describe what the 5 C's are for the company Lululemon. Define Lululemon's character, capacity or cash flow, capital, conditions and collateral using the definitions listed below.

• Character: It gives an idea about the creditworthiness of the borrower, that the commitment factor or the past records about paying back the loan in time.

• Capacity or Cash Flow: The capacity factor is the ability of the borrower to pay back the loan. The cash flows that are generated by the borrowing company are required to be known by the company that is lending money in order to know and analyze and get an idea whether the money can be repaid by the borrower.

• Capital: It is the amount of the money that is invested into the business to start the business process. It is a useful piece of information since it speaks about creditworthiness of the borrower. A borrower who has invested some amount of money for starting business is more financially stable than someone who has borrowed the entire money to start the business.

• Conditions: The state of the business, whether the current stage of the business is profitable or loss making has to be known before lending out money to them.

• Collateral: The collateral guarantees are also an essential part of the loan sanctioning process. The borrowers are to provide a backup to the lenders in case they are not able to payback the loans.

Answer 1

All notes below have been written with the help of reference to the company's latest quarterly report available on their website.
(http://investor.lululemon.com/static-files/3146caca-1c30-43ea-8561-b3b172f1b0d1)

CHARACTER
"On June 6, 2018, the Company entered into Amendment No. 1 to its credit agreement. This amended the credit agreement to provide for (i) an increase in the aggregate commitments under the unsecured five-year revolving credit facility to $400.0 million, with an increase of the sub-limits for the issuance of letters of credit and extensions of swing line loans to $50.0 million for each, (ii) an increase in the option, subject to certain conditions as set forth in the credit agreement, to request increases in commitments under the revolving facility from $400.0 million to $600.0 million, and (iii) an extension in the maturity of the revolving facility from December 15, 2021 to June 6, 2023. 10 Table of Contents In addition, this amendment decreased the applicable margins for LIBOR loans from 1.00%-1.75% to 1.00%-1.50% and for alternate base rate loans from 0.00%-0.75% to 0.00%-0.50%, reduced the commitment fee on average daily unused amounts under the revolving facility from 0.125%-0.200% to 0.10%-0.20%, and reduced fees for unused letters of credit from 1.00%-1.75% to 1.00%-1.50%."

Given that the company was able to increase its credit facility and also decrease the interest margin, proves it`s credibility to the bank and hence the fact that the company has always done timely payments and ensured that it fulfills any commitments.

CAPACITY OR CASH FLOW

For the quarter ending August 4, 2019, the company has:

• Positive cash flow from operating activities
• Negative cash flow from investing activities
• Negative cash flow from financing activities
• Cash balance of USD 624 million

This shows that the company is generating sufficient money to repay its debt, repurchase shares, pay dividends as well as make capital investments. Further, even in case of any bad situation, the company still has sufficient money in its bank account to make it pass through the downturn.

CAPITAL

The company has no debt on its books. Rather the company is retaining shareholder`s money to invest back into the company. The high retained earnings and equity share capital with negligible debt prove that the company is financially stable and has good creditworthiness.

CONDITIONS

• Company has a healthy gross and operating margin
• The company`s net income has been positive for quite some time now.

Given that the company has been profitable for a few years now and also has a very healthy margin mix, we can say that the company`s condition is very good.

COLLATERAL

• Company has property and equipment of more than USD 600 Million
• Company has a very high and strong cash balance

The company`s property and equipment can easily be used as collateral for taking loans.