Amidst a volatile market, Lululemon Athletica Inc (LULU, Financial) has experienced a notable daily loss of 15.8%, compounded by a three-month decline of 21.18%. Despite these fluctuations, the company boasts a robust Earnings Per Share (EPS) of 12.2. This raises an essential question for investors: Is Lululemon Athletica modestly undervalued? This article delves into a valuation analysis to uncover the answer and guide potential investors through an informed decision-making process.
Company Introduction
Lululemon Athletica Inc (LULU, Financial), a leader in the athletic apparel sector, has established a significant presence with over 680 company-owned stores in 19 countries. Founded in 1998 and headquartered in Vancouver, Canada, Lululemon Athletica designs, distributes, and markets high-quality athletic apparel, footwear, and accessories for a diverse clientele. The company's success is reflected in its impressive market cap of $50.70 billion and sales of $9.60 billion. As we compare the current stock price of $401.98 to the Fair Value (GF Value) of $507.29, we see an opportunity for a deeper valuation exploration.
Summarize GF Value
The GF Value is a unique measure of a stock's intrinsic value, incorporating historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. Lululemon Athletica (LULU, Financial) appears to be modestly undervalued according to this metric. The GF Value Line suggests a fair trading value that the stock should ideally meet. Lululemon Athletica's current stock price, which stands below the GF Value Line, suggests that the stock may offer a higher future return, given its valuation.
Because Lululemon Athletica is relatively undervalued, the long-term return of its stock is likely to outpace its business growth, offering a potentially attractive investment opportunity.
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Financial Strength
Investors seeking to avoid permanent capital loss must scrutinize a company's financial strength. Lululemon Athletica's cash-to-debt ratio of 0.93 ranks it better than 64.07% of its peers in the Retail - Cyclical industry. With an overall financial strength rating of 7 out of 10, Lululemon Athletica's fiscal health is considered fair.
Profitability and Growth
Profitable companies, particularly those with consistent profitability, pose less investment risk. Lululemon Athletica has maintained profitability for the last decade, with an operating margin of 21.94%, ranking higher than 95.75% of the industry. The company's profitability is ranked 10 out of 10, indicating a strong financial performance.
Growth is a crucial valuation factor, as it often correlates with a company's long-term stock performance. Lululemon Athletica's 3-year average revenue growth rate surpasses 88.91% of the industry, and its 3-year average EBITDA growth rate of 25.2% ranks higher than 73.99% of its peers, signaling promising growth prospects.
ROIC vs. WACC
An insightful way to evaluate profitability is by comparing Return on Invested Capital (ROIC) to the Weighted Average Cost of Capital (WACC). Lululemon Athletica's ROIC of 31.35 signifies efficient cash flow generation relative to invested capital, substantially exceeding its WACC of 10.48. This differential suggests a strong value creation potential for shareholders.
Conclusion
Overall, the analysis indicates that Lululemon Athletica (LULU, Financial) stock is modestly undervalued. The company demonstrates solid financial health and exceptional profitability, with growth rates that outshine a substantial portion of its competitors. For a more detailed financial overview, investors are encouraged to review Lululemon Athletica's 30-Year Financials.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
