With a daily gain of 8.43%, a 3-month gain of 7.75%, and an Earnings Per Share (EPS) (EPS) of 7.9, Lululemon Athletica Inc (LULU, Financial) has been on investors' radar. The question remains: is the stock modestly undervalued? This article provides an in-depth valuation analysis to answer this question. Read on to gain valuable insights into Lululemon Athletica's financial performance and intrinsic value.
Company Introduction
Lululemon Athletica Inc. designs, distributes, and markets athletic apparel, footwear, and accessories for women, men, and girls. The company was founded in 1998 and is based in Vancouver, Canada. It sells its products through more than 670 company-owned stores in 19 countries, e-commerce, outlets, and wholesale accounts. The company's stock price is currently $409.53, with a market cap of $51.80 billion. Comparing this to the GF Value, an estimation of fair value, will provide a better understanding of the company's value.
Understanding GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, computed considering historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line denotes the stock's ideal fair trading value.
The stock of Lululemon Athletica (LULU, Financial) appears to be modestly undervalued based on GuruFocus' valuation method. The GF Value estimates the stock's fair value based on historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the stock's share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. On the other hand, if the stock's share price is significantly below the GF Value Line, the stock may be undervalued and have high future returns.
Because Lululemon Athletica is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth.
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Financial Strength
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to understand its financial strength. Lululemon Athletica has a cash-to-debt ratio of 0.93, which ranks better than 63.01% of 1103 companies in the Retail - Cyclical industry. The overall financial strength of Lululemon Athletica is 7 out of 10, which indicates that the financial strength of Lululemon Athletica is fair.
Profitability and Growth
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Lululemon Athletica has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $8.80 billion and Earnings Per Share (EPS) of $7.9. Its operating margin is 22.12%, which ranks better than 95.51% of 1113 companies in the Retail - Cyclical industry. Overall, the profitability of Lululemon Athletica is ranked 10 out of 10, which indicates strong profitability.
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Lululemon Athletica is 27.8%, which ranks better than 88.45% of 1048 companies in the Retail - Cyclical industry. The 3-year average EBITDA growth is 25.2%, which ranks better than 76.54% of 895 companies in the Retail - Cyclical industry.
ROIC vs WACC
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Lululemon Athletica's ROIC is 31.21 while its WACC came in at 11.31.
Conclusion
In summary, the stock of Lululemon Athletica (LULU, Financial) appears to be modestly undervalued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 76.54% of 895 companies in the Retail - Cyclical industry. To learn more about Lululemon Athletica stock, you can check out its 30-Year Financials here.
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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.
