Assessing Lululemon's Value After a 55.8% Drop and Shifting Consumer Trends

• Wondering if lululemon athletica is a bargain or overpriced? You are not alone, and getting the value right could be your edge in the market.
• Despite making headlines in the past, the stock has recently stumbled, with a -2.9% return over the last 7 days and a hefty -9.2% dip in the past month, pushing its year-to-date drop to an eye-catching -55.8%.
• Much of this recent slide follows news around shifting consumer trends and analyst debates on future growth, as well as broader market volatility in retail stocks. These conversations have amplified questions about how much value is left on the table with lululemon athletica's shares.
• Our Simply Wall St valuation framework gives lululemon athletica a solid 5 out of 6 on our undervaluation checks, but there is more than one way to look at fair value, and even better ways to understand a stock's worth than most investors realize. Let’s break down the numbers and see how the story really stacks up.

Find out why lululemon athletica's -47.7% return over the last year is lagging behind its peers.

Approach 1: lululemon athletica Discounted Cash Flow (DCF) Analysis

The Discounted Cash Flow (DCF) model estimates what a company is worth by projecting its expected future cash flows and then discounting those values back to today. This approach provides a grounded view of intrinsic value based on the company’s ability to generate real cash in the years ahead.

lululemon athletica’s current Free Cash Flow stands at approximately $1.16 Billion. According to analyst forecasts, this figure is expected to grow steadily, reaching about $1.60 Billion by 2030. It is important to note that while analyst estimates are available for the next five years, longer-term projections beyond that are extrapolated using established methodologies.

The DCF calculation gives lululemon athletica a fair value of $253.26 per share. Based on the latest prices, this represents a 35.0% intrinsic discount. In other words, the share price currently trades below what this model suggests is fair value. Essentially, the DCF analysis signals that the market may be underestimating the future cash-generating potential of lululemon athletica.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests lululemon athletica is undervalued by 35.0%. Track this in your watchlist or portfolio, or discover 915 more undervalued stocks based on cash flows.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for lululemon athletica.

Approach 2: lululemon athletica Price vs Earnings (PE)

The Price-to-Earnings (PE) ratio is a widely-used valuation metric for profitable companies, as it directly relates a company’s share price to its per-share earnings. Because lululemon athletica posts solid profits, the PE ratio gives investors a straightforward way to gauge whether the stock is reasonably priced based on its ability to generate earnings.

Determining what constitutes a “normal” or “fair” PE ratio depends largely on two factors: how fast a company is expected to grow and the level of market risk associated with it. Higher expected earnings growth often justifies a higher PE, while greater risk can warrant a larger discount.

lululemon athletica currently trades at a PE ratio of 10.94x. That stands well below both the average PE for its Luxury industry peers at 19.32x and the peer group average of 44.11x. This signals a notable discount. However, simply comparing PE ratios does not account for company-specific dynamics such as growth potential, profit margins, and scale.

This is where Simply Wall St’s proprietary "Fair Ratio" comes in. It blends factors like future earnings growth, industry context, profit margins, market cap, and risk to arrive at a more nuanced benchmark. Unlike basic industry or peer comparisons, the Fair Ratio is designed to reflect what would be a justifiable PE for lululemon athletica given its unique position. For the company, the Fair Ratio stands at 15.57x.

Comparing lululemon athletica’s actual PE of 10.94x to the Fair Ratio suggests that the stock is currently undervalued, with the market pricing in lower expectations than what company fundamentals would support.

Result: UNDERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1422 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your lululemon athletica Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let’s introduce you to Narratives. A Narrative is a simple but powerful concept: it is your unique perspective on lululemon athletica’s future, expressed as a story that connects what you think will happen to the numbers behind a fair value, such as your own estimates of revenue growth, profit margins, and risk.

Instead of relying only on traditional models or analyst forecasts, Narratives allow you to weave together qualitative insights and quantitative forecasts, helping you decide what you believe is probable for the company and see how this translates to a share price. Narratives are easily accessible on Simply Wall St’s Community page, and they are used by millions of investors to visualize and compare different viewpoints.

With Narratives, you can quickly compare your estimated fair value to lululemon athletica’s current market price, guiding decisions on whether to buy or sell based on your confidence in the company’s story. As soon as new information, like earnings reports or breaking news, arrives, Narratives update automatically, so your perspective stays relevant and informed.

For example, some investors see lululemon athletica’s fair value as high as $354.94, expecting strong future growth and ongoing brand momentum, while others are more cautious, setting their fair value nearer to $100.00 and prioritizing risks from competition and slowing sales.

Do you think there's more to the story for lululemon athletica? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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