We came across a bullish thesis on Lululemon Athletica Inc. (LULU) on Rijnberk InvestInsights’ Substack by Daan Rijnberk. In this article we will summarize the bulls’ thesis on LULU. Lululemon Athletica Inc. shares were trading at $260 when this thesis was published, vs. closing price of $248.59 as of Sept 9.
A group of professional athletes wearing the company’s performance apparel in a sports event.
Lululemon is positioned as a leading brand in the athleisure market, ranked among the top 100 most valuable brands globally. With a focus on high-end apparel, innovation, and expansion into new product categories and regions beyond North America, Lululemon has significant growth potential. Despite recent setbacks and a 50% decline in share price since the start of the year, largely due to industry-wide challenges and market sentiment, the company remains a strong contender, outpacing peers like Nike and capturing market share. Although growth has slowed, Lululemon continues to gain popularity among younger generations and stands to benefit from the expected long-term growth in the athleisure market.
Lululemon’s Q2 results, though mixed, highlight solid underlying business trends. The company reported a 7% year-over-year increase in revenue to $2.4 billion, despite facing a cautious consumer environment. International growth was particularly robust, with revenue outside North America up 29% year-over-year, including a 34% increase in China, indicating substantial global expansion potential. While some product and inventory missteps have hindered innovation, management expects a return to historical levels by spring 2025, positioning the company for renewed growth.
Financially, Lululemon continues to perform well, with gross profit at $1.4 billion and a record gross margin of 59.6%, up 80 basis points year-over-year. Operating margins grew 110 basis points year-over-year to 22.8%, and the net income margin expanded by 120 basis points to 16.6%, leading to an 18% increase in EPS to $3.15. The company maintains a healthy net cash position, ending the quarter with $1.6 billion in cash against $1.5 billion in debt. Management’s confidence is reflected in $584 million of share buybacks in Q2, with $1 billion still available for future repurchases.
Despite cutting its FY24 outlook due to current headwinds, Lululemon remains committed to its 2026 revenue target of $12.5 billion, indicating long-term growth potential. Shares are currently trading at a forward P/E multiple of just 18.5x, compared to 26.5x for Nike, and a PEG ratio of 1.4x, a 50% discount to its five-year average. This suggests that the stock is undervalued, especially given its potential for double-digit sales and EPS growth. Using a conservative 20x multiple on FY26 EPS estimates, Lululemon’s stock could reach a target price of $357 by the end of 2026, offering an estimated 14% annual return or 38% total upside. At around $260 per share, Lululemon presents a compelling opportunity for investors, reflecting its strong financial position and growth prospects.
Lululemon Athletica Inc. is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 45 hedge fund portfolios held LULU at the end of the second quarter which was 51 in the previous quarter. While we acknowledge the potential of LULU as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as LULU but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.