Can Lululemon’s Recent 6% Rally Signal a Turnaround After This Year’s Steep Decline?

Thinking about what to do with lululemon athletica stock right now? You are definitely not alone. With the price ticking up 6.0% just in the past week, some investors are wondering if the worst might be over, while others remember the -53.4% slide since January and wonder if there is still more pain ahead. Long-term holders have seen the shares drop by nearly half from their five-year highs, reflecting a sizable shift in sentiment and risk perception over that period.

Despite these wild swings, it is not all doom and gloom. Lululemon actually shines pretty brightly when you dig into most traditional valuation methods. In fact, the company earns a value score of 5 out of a possible 6, meaning it is considered undervalued in five of the six key checks analysts typically look at. That number jumps out for a brand with as much visibility and global runway as lululemon. The big question, though, is if these valuation models tell the full story or if there is a smarter way to sense where the real opportunity lies.

Next, I will walk you through how lululemon stacks up using the standard valuation approaches, and hint at an even better lens for sizing up its true value at the end of the article.

Why lululemon athletica is lagging behind its peers

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

The Discounted Cash Flow (DCF) model looks at the company’s future cash generation power by projecting its free cash flows and then discounting those amounts back to the present value. For lululemon athletica, this approach provides a well-grounded view of what the business might realistically be worth today based on expected performance rather than just the mood of the market.

Currently, lululemon reports free cash flow of $1.16 Billion. Analyst forecasts see this growing steadily, with next year’s projection at $1.21 Billion and estimates rising toward $1.6 Billion by 2030. While analysts only publish estimates for the next five years, Simply Wall St extrapolates further based on recent trends. This suggests a continued climb even beyond the official outlook.

Running all those projected numbers through the DCF model yields an estimated intrinsic fair value of $255.68 per share. Compared to the current share price, this represents a 32.2% implied discount, which means lululemon stock comes up as notably undervalued by this method.

Result: UNDERVALUED

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

Our Discounted Cash Flow (DCF) analysis suggests lululemon athletica is undervalued by 32.2%. Track this in your watchlist or portfolio, or discover more undervalued stocks.

Approach 2: lululemon athletica Price vs Earnings (PE)

The Price-to-Earnings (PE) ratio is widely seen as the go-to yardstick for valuing profitable companies like lululemon athletica. It offers investors a snapshot of how much they are paying for each dollar of company earnings, making it especially useful when the business has consistent profits.

What counts as a “normal” PE ratio often depends on factors such as how fast a company is expected to grow, its risk profile, and the quality of its earnings. High-growth companies usually command higher PE ratios, reflecting investors’ willingness to pay more for expected future earnings. Conversely, slower growers or riskier names see lower ratios.

Right now, lululemon trades on a PE ratio of 11.5x, which is considerably lower than both the industry average of 21.16x and the average of its listed peers at 65.53x. This initially makes the stock look quite cheap by these simple yardsticks. However, Simply Wall St’s proprietary “Fair Ratio” offers a more tailored benchmark, factoring in lululemon’s expected earnings growth, risk profile, profit margins, and its standing within the Luxury industry. The Fair Ratio for lululemon is calculated at 18.04x, providing a more precise sense of what investors should pay for a business with lululemon’s characteristics.

Because the current PE ratio is significantly below this Fair Ratio, the stock appears undervalued using this approach, even more so than a plain industry or peer comparison would suggest.

Result: UNDERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 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. Narratives are a simple yet powerful tool that lets you shape the story behind a company’s numbers by expressing your own expectations for lululemon athletica’s future revenue, profits, and margins to map out an informed fair value that fits your view of the business.

Unlike traditional analysis, a Narrative ties your perspective about the company’s unique opportunities or risks directly to a dynamic financial forecast. This approach turns your outlook into an actionable fair value estimate. Anyone can easily build a Narrative in moments on the Simply Wall St Community page, where millions of investors share and refine their own perspectives in real time.

This approach helps you decide when to buy or sell by always comparing your Narrative’s fair value to the latest share price, and it stays fresh as market-moving news or earnings updates flow in. For example, some investors believe lululemon has substantial global growth ahead and rate its fair value above $225 per share, while others are more cautious about competition and margin pressure, resulting in values closer to $100. With Narratives, you see these realities unfold and can choose the story that best matches your own conviction as the facts change.

Do you think there's more to the story for lululemon athletica? Create your own Narrative to let the Community know!

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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