Lululemon Stock Rallying Back to Its True Value

Key Points

• Lululemon stock is jumping by more than 12% after reporting its quarterly earnings figures, suggesting that its recent rally is a return to its true value.
• Analysts still see up to double-digit upside even after the after-market rally. Solid fundamentals justify these beliefs.
• Smart money, along with management, likes the stock enough to buy more of it in the past quarter.

After trading down to a tragic 60% of their 52-week high levels, shares of Lululemon Athletica Inc. NASDAQ: LULU just gave fundamental investors another reason to add this stock to their potential buy watchlists. In the after-market hours of June 6, the stock rallied by as much as 50 points, or 13.6%, from its previous closing price.

While some investors thought inflation would deteriorate settings in the consumer discretionary sector, Lululemon’s market penetration is no match for today’s economic environment. As shareholders pour over the company’s financial results, this brand ‘moat’ should be at the top of mind. Remember that yesterday’s discounts may have been a generational potential buying opportunity – that isn’t over yet.

Before the nitty gritty details are discussed, investors should also consider a potent adversary in this industry, Nike Inc. NYSE: NKE. Looking through a professional trader’s lens, this time, Lululemon could be the better hypothetical investment.

Lululemon’s Success in Today’s Economy: What You Need to Know

Economists have had to wake up to a harsh economic reality lately. The nightmare of stagflation has made it out of the pillowcase. Defined as low economic growth with high inflation, the U.S. economy is now starting to fit the profile.

The past quarter pushed out a revised gross domestic product (GDP) growth rate of only 1.3% when inflation exceeded 3%. Because of this economic phenomenon, investors should update their portfolio preferences to include stocks with the potential promise of above-average growth relative to peers and the economy.

Because Lululemon’s brand holds nearly 7% of the athleisure and apparel market share, compared to Nike’s 30%, the company has much more room to grow its brand at much faster rates than its competitors, a trend that analysts have also spotted.

Wall Street thinks Lululemon could grow its earnings per share (EPS) at an 11.2% clip in the next 12 months, definitely above GDP and Nike’s projection for 5.9% EPS growth. These projections aren’t the only trends showing that Lululemon could show a potential discount to its bright future ahead.

Lululemon’s Stock Dip Attracts $1 Billion in Insider Purchases

In the company’s quarterly earnings press release, management announced a $1 billion share repurchase program, which can be taken as a sign that the stock is undervalued today and expected to move higher in the short term.

Keeping in tune with how significant growth is becoming in today’s market, Lululemon is starting to penetrate international markets, which is bearing fruit on its revenue growth. Net revenue growth was reported at 10%, yet international revenue jumped by 35%.

By entering new markets and achieving economies of scale, Lululemon’s operations are becoming more efficient. Investors can see this trend in the company’s gross profit margin, which jumped from 57.5% in 2023 to 57.7% in 2024.

Investors probably cared most about the 11.4% jump in EPS over the year, which made analyst estimates all the more realistic going forward. More importantly, operating cash flows more than doubled from $45.5 million to $127.5 million, funding the company’s $1 billion stock buyback program.

Moving forward, management’s 2024 outlook shows an increase in operating margins from 19% to 23.3%, which could be another reason for management’s willingness to buy the stock today.

Knowing that the Telsey Advisory Group now sees a valuation for Lululemon stock of up to $550 a share, or 78.3% higher than today’s price, investors can start seeing a trend behind management’s buying decision.

The Goldman Sachs Group also boosted its price targets for Lululemon stock to $463 a share, daring it to rally by 50.2% from its current level.

What the Market Thinks About Lululemon Stock

Here’s what professional traders look for: it all starts with relative valuation centered around earnings growth. Because Lululemon stock is set to grow its EPS at nearly twice the rate of its peer, Nike, markets should be willing to pay a premium valuation for the stock that offers a better deal.

Markets clearly show this trend on a price-to-sales (P/S) basis. At a 4.1x multiple, Lululemon starts to command a premium of 47.1% over Nike’s valuation of 2.8x P/S today.

Helping the stock rise to these premium valuations comes the Vanguard Group. Apart from being Lululemon’s largest shareholder, the asset manager upped its stake by an additional 1.6% to bring its net investment up to $3.9 billion in dollar terms.

Management’s ‘Power of three x2’ plan of doubling 2021 revenue by 2026 up to $12.5 billion is accurate enough for markets to back. The stock’s recent 13% rally indicates the possibility of it rallying back to its actual value.