Lululemon Athletica (LULU) is Growth at a Discount

Yoga pants revolutionized Lululemon Athletica’s (LULU) fortune, transforming it into a global athleisure powerhouse. 

The company’s technical fabrics and sleek designs have won over fitness enthusiasts and fashion-conscious consumers alike.

Yet, it’s not immune to the cash-strapped consumer.

While the company beat earnings expectations in its latest quarterly report, comparable sales in the U.S. decreased 3% for the quarter. Management also cut guidance, sending shares lower.

However, the stock had already taken a beating after the sector was downgraded back in late July.

Despite all this, analyst notes have been relatively upbeat. And search volume by financial pros remains robust compared to other retail stocks, according to our TrackStar data.

The real question is whether this latest dip is a buying opportunity or the first of the dominoes to fall.

Lululemon’s Business

Operating 721 stores across 17 countries, Lululemon offers a comprehensive line of performance apparel, footwear, and accessories. 

Their products cater to various athletic activities, including yoga, running, and training, while also appealing to consumers seeking comfortable, fashionable athleisure wear.

Lululemon segments its business into the following areas:

• Americas (73% of total revenues) – Includes retail and e-commerce operations in the United States and Canada
• China Mainland (13% of total revenues) – A rapidly growing market for the brand
• Rest of World (13% of total revenues) – Covering Asia Pacific, Europe, and the Middle East

Q2 2024 saw Lululemon flex its muscles with a 7% revenue boost to $2.4 billion. 

While the U.S. market showed signs of strain, international sales surged, with China Mainland skyrocketing 34% and Rest of World leaping 24%.

The company’s “Power of Three ×2” strategy isn’t just a catchy name. It’s propelling Lululemon’s growth through product innovation, market expansion, and enhanced customer experiences. 

Source: LULU Q2 2024 Investor Infographic

Still, the company faces increased competition from names like Nike and Adidas. Plus, its 2022 expansion into footwear has had mixed results. 

And like other retailers, Lululemon faced excess inventory challenges after the pandemic. Earlier this year, the company found itself with the wrong products on shelves and not enough of the right ones.

Management plans to use Q3 to rebalance things, getting the right products where they need to be while removing others from the shelves.

Financials

Source: Stock Analysis

Lululemon’s revenue growth has been spectacular.

When the company doesn’t perform as well, it still hits 13% YoY improvements.

Even in the latest report, sales in China exploded.

The company also runs incredibly high margins, with free cash flow close to 17% and profit margins just below that.

With hardly any debt and annual operating cash flow of $2.3 billion and $650 million CAPEX, there is still plenty of money to keep repurchasing $600 million to $1.2 billion shares annually, a yield of 1.9% to 2.8%.

Valuation

Source: Seeking Alpha

While Lululemon’s stock trades at a premium to its peers, it’s not as wide of a gap as it typically has.

The company currently trades over 50% below its 5-year average price-to-earnings and cash flow ratios.

In fact, it’s now cheaper than Ross Stores (ROST) and TJX Companies (TJX) on a price-to-cash flow basis.

Growth

Source: Seeking Alpha

When we look at growth over multiple years, we find that Lululemon dominates across nearly every category.

Sure, it may not top the list one year compared to another company. Abercrombie and Fitch (ANF) had better sales growth this year.

However, over multiple years, the company has outperformed every other company in this category.

Profitability

Source: Seeking Alpha

Lululemon may not have the best gross margin…at the moment.

However, there’s no denying its excellent standing in net income and free cash flow margins, which trounced all its competitors.

Plus, it offers excellent returns on equity, assets, and total capital.

Our Opinion 10/10

We think that the latest selloff provides an excellent opportunity to own a stock that’s bucked the trend of other retailers.

While a pullback in consumer spending will hit the company, they are in much better shape to handle it than nearly everyone else.

Lululemon has strong brand recognition, knows how to fix its current problems, and still has plenty of runway to grow both domestically and internationally.

This is a great stock at a cheap price.

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