Lululemon Athletica (LULU) is a Steal - InvestingChannel

Lululemon Athletica (LULU) is a Steal

Proprietary Data Insights

Financial Pros’ Top Apparel Stock Searches in the Last Month

Rank Ticker Name Searches
#1 LULU Lululemon Athletica 108
#2 BURL Burlington Stores 25
#3 GPS Gap 15
#4 GES Guess 6
#5 ANF Abercrombie & Fitch 2
#ad Up to $950M on One Contract—This AI Upstart’s Bold

Lululemon Athletica (LULU) is a Steal

No fashion company has shown more promise in the last decade than Lululemon Athletica (LULU).

Coining the term athleisure wear, the company made yoga pants a closet staple for women worldwide.

Today, Lululemon commands a $42 billion market cap built on decades of double-digit sales growth.

Yet, the last quarterly earnings report, which beat both earnings and revenue estimates, wasn’t well received by investors.

Shares have plunged 30%, and show no signs of slowing.

Financial pros continue to search out the stock in earnest, according to our TrackStar data.

But are they looking for a bottom or just watching a plane crash?

Lululemon Athletica’s Business

Yoga pants, sweat-wicking tops, and a cult-like following – Lululemon has transformed workout wear into a booming business.

Founded in 1998 in Vancouver, lululemon pioneered the “athleisure” trend – fashionable, high-quality clothing designed for both exercising and everyday wear. 

The company’s stylish yet functional products include fitness pants, shorts, tops, and jackets designed for healthy lifestyle and athletic pursuits, such as yoga, training, and running. They also sell fitness-related merchandise, including bags, socks, underwear, yoga mats, instructional yoga DVDs, water bottles, and other items.

Lulu’s focus on innovation and strong community engagement have fueled its impressive growth. From a single yoga studio to over 700 stores globally, lululemon has become an iconic brand.

The company’s business is divided into three key segments:

Women’s Products (63.9% of revenue): Core offerings include leggings, joggers, shorts, tops, jackets, and accessories designed for activities like yoga, running, and training. Bestsellers are the Align collection and Wunder Under tights. Targets active women seeking comfort, performance, and style.

Men’s Products (23.4% of revenue): Shirts, shorts, pants, outerwear, and accessories for training, running, and commuting. ABC (anti-ball crushing) pants are a top seller. Appeals to athletic males wanting functional yet fashionable gear.

Other (12.7% of revenue): Includes footwear and accessories ranging from bags to yoga mats to water bottles. Expands lululemon’s head-to-toe offering.

80% of sales come from the Americas, with 10% each coming from China and the rest of the world.

Lululemon’s “Power of Three” growth strategy, introduced in 2019 and updated to “Power of Three x2” in 2022, focuses on driving business expansion through product innovation, omni-channel guest experiences, and market expansion. 

By investing in these key areas, Lululemon aims to double its revenue from 2018 levels by 2026. 

The updated plan builds on the success of the original strategy and demonstrates Lululemon’s confidence in its ability to sustain strong growth and maintain its competitive edge in the sportswear market.



Source: Stock Analysis

Lululemon posted stellar FY23 results, with revenue up 20% to $9.6B and adjusted EPS jumping 27% to $12.77. 

The strong momentum continued in Q4, as total comparable sales rose 12%. 

However, the company sees a slower FY24 ahead, guiding for $10.7-10.8B in revenue and $14.00-14.20 EPS, slightly below analyst estimates. Supposedly, this was enough to knock off nearly a third of the stock’s value.

That seems a bit much, considering the company averages over 20% sales growth yearly, with profitability and cash flow improving even faster.

Plus, the company carries very little debt. That’s why any excess cash flow has been used to repurchase shares, with the company buying back $600 million worth in 2023, equal to about 1%.



Source: Seeking Alpha

Despite its sizzling growth, Lululemon trades at fairly reasonable valuations.

Its forward P/E ratio sits at 23.6x, which is lower than Burlington Stores’ (BURL) 26.3x.

However, it runs the highest price-to-cash flow ratio at 18.5x.

Older companies that have struggled with growth, like Gap (GPS), Guess (GES), and Abercrombie (ANF) all trade at less than 10x cash.



Source: Seeking Alpha

The key differentiator in valuation comes down to growth.

No other apparel retailer can match the consistently high numbers put up by Lululemon.

Sure, you might find one or two categories where it’s not the top.

But overall, it smokes the competition.



Source: Seeking Alpha

Even more impressive is Lululemon’s profitability.

It runs the second-highest gross margin and is double the closest EBIT and net income margin.

Even its free cash flow margin is significantly higher than that of its peers.


Our Opinion 9/10

We see the stock’s latest selloff as an opportunity to pick up shares.

No other apparel retailer puts up the kind of growth and profitability measures that Lululemon does.

While there isn’t a lot of cash being generated and returned to shareholders, management consistently spends capital to buyback shares.

We like the story and lifestyle brand here and see no reason the stock couldn’t rebound when the market does.

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