We came across a bullish thesis on Lululemon Athletica Inc. (NASDAQ:LULU) on ValueInvestorsClub by megatron48. In this article, we will summarize the bulls’ thesis on LULU. The company’s shares were trading at $344 when this thesis was published, vs. the closing price of $368.22 on Feb 25.
Andrea Meling/Shutterstock.com
LULU designs, distributes, and retails athletic apparel, footwear, and accessories under the Lululemon brand for women and men.
LULU is trading at ~27x its trailing EPS and approximately 23x its forward EPS estimates. This is a low figure compared to its historical level. The latest product assortment has been a key driver for why the stock has not been performing well but there are a number of factors that warrant a higher value for the stock. LULU enjoys one of the highest percentage repeat purchase rates, an indication of strong customer loyalty and goodwill. A single instance of bad product assortment should not be so punitive and the brand has bounced back in the past when the stock price fell by 50% in 2013 and 35% in 2017 by revamping its product line.
The current price factors in a lower projected EPS growth by analysts. If the assortment is improved, the same-store sales growth could clock a rate of 8% next year compared to a more pessimistic 5% forecasted by analysts. Factoring in store growth and operating level, the expected growth rate is 15%, much higher than 7% which is what the street expects. A more impressive growth rate would command a higher valuation of 30x, providing a share value of $479 or a 30% upside from its current price.
LULU has a strategy to introduce a new product line in the spring of 2025. The current offerings have been a deviation from its core strategy that relied on minimalistic and clean designs. The old assortment of products is quickly being removed from the shelves and by mid-2025 the business is expected to flourish. The streets should attribute a higher multiple if LULU manages to achieve mid to high single-digit growth in its business, creating a possible 30% upside on the share price.
While we acknowledge the potential of LULU as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than LULU but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article was originally published at Insider Monkey.
Hedge Fund Resource Center