Is Lululemon’s Current Valuation a Rare Long-Term Buying Opportunity?

Legging leader Lululemon Athletica (NASDAQ: LULU) was riding high last December, hitting an all-time peak of $520. Since then, we’ve witnessed a drop that would give anyone pause. The stock has taken quite a hit, and is currently down some -47.09% YTD.

Chart courtesy TradingView

There are a couple of reasons why. First, LULU was a big pandemic winner, benefitting from the at-home fitness boom. The subsequent correction, profit-taking, and general shakiness in the retail sector are one part of the story.

The other part is LULU’s last earnings call. While revenue grew by 7.3% YoY, it fell short of analyst projections, missing estimates by a small margin. Comparable sales in the Americas actually decreased by 3%, while net revenue in the region rose by just 1%.

While earnings per share at $3.15 outperformed consensus estimates of $2.93, guidance for the next quarter was also more conservative than anticipated, having been revised to $0.5 billion less than before.

That earnings call was not ideal, but we’d hardly call it something that fits in the wider picture of a stock that’s down -47.09% YTD. It’s possible that it’s a steep overcorrection — one that potentially represents a very good long-term play.

The most notable argument here is valuation. LULU is currently trading at a 10-year low in terms of P/E ratio. The company’s P/E sits at around 20.47x — less than the industry average of 25.01x and the wider market average of 23.78x. (Click here to see the latest due diligence checks on LULU.)

In fact, LULU’s valuation has only dipped (and very briefly) close to these levels twice in the last 10 years. Put simply, the stock hasn’t been this affordable for a very long time.

Valuation, however,  means very little without growth prospects. Thankfully, things aren’t as gloomy as you might expect on that front — LULU's earnings are forecast to grow faster at 8.31% per year than the US Apparel Retail industry average of 6.79%, while revenues are forecast to grow at 7.02%, also outpaced the industry average of 4.53%.

Lululemon is also forecasted to generate a high return on equity of 48.78% within the next three years. Profit margins have surged by 4.9% over the past year alone, now standing at an impressive 16.3%. 

On the financial side, the company’s balance sheet remains quite healthy. Its debt-to-equity ratio (D/E) has improved, down to 0.67 from 0.79 five years ago

LULU’s international expansion, particularly in China, continues to be a key growth driver. In the most recent quarter, net revenue increased by 34% in China, compared to a 24% increase in the rest of the world. Comparable sales in China rose by 21%, while the rest of the world saw a 17% increase. 

Further adding to investor confidence, Lululemon’s CEO, Calvin McDonald, recently purchased 4,000 shares at $260 per share, totaling $1.04 million. This level of insider buying is a strong signal of management’s confidence in the company’s future prospects.

Once all is said and done, we don’t see a scenario where LULU could surge back to its all-time high price — but looking at the current situation, it’s becoming increasingly apparent that the stock is significantly undervalued.

—> Click here to research LULU — you might also want to check out our bullish insider buys list

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