Is Lululemon's Recent Pullback Your Perfect Entry Point?
CHINA - 2025/04/17: A shopper walks past the Canadian sportswear clothing band Lululemon store. ... More (Photo by Sebastian Ng/SOPA Images/LightRocket via Getty Images)
Lululemon stock (NASDAQ:LULU) is currently trading at approximately $331 and seems undervalued based on its strong fundamentals, even though the stock often experiences volatility during turbulent market conditions. The company provided impressive Q1 2025 results, with revenue increasing by 7% to $2.37 billion and EPS rising to $2.60, just surpassing expectations. However, the market concentrated on a weaker-than-anticipated 1% increase in same-store sales and a revised full-year outlook, influenced in part by tariff-related pressures. The consequence? A swift 22% decline in after-hours trading that reflects more about short-term market sentiment than long-term intrinsic value.
In spite of its high-performance profile, LULU behaves like a value stock. Lululemon trades at about 18x its trailing earnings (slightly lower than the historical average) and 19x price-to-free cash flow – both figures are beneath the S&P 500's averages—yet it is a company that consistently excels in revenue, margins, and return on capital. In comparison with its main competitor Nike, Lululemon is more affordable across significant profit metrics, with a reduced P/E and a more appealing P/FCF ratio. Investors are essentially acquiring Ferrari performance at Lexus pricing. Moreover, with a $32 billion market cap generating $1.6 billion in trailing free cash flow—a 5% cash flow yield, LULU appears to be more of a long-term wealth builder than a fluctuating apparel brand. For those looking for lower volatility compared to individual stocks, the Trefis High Quality portfolio offers an alternative – having outperformed the S&P 500 and yielding returns exceeding 91% since inception.
Lululemon continues to showcase its growth capabilities. The company reports an impressive three-year revenue CAGR of 19%, which is more than three times the S&P 500's 5.5%. Over just the past year, it demonstrated 10% revenue growth, increasing annual sales to about $11 billion. Despite encountering macroeconomic challenges, the brand persists as a global growth powerhouse with an expanding international presence and remarkable efficiency.
Its operating margin over the last four quarters of 23.7% nearly doubles the S&P 500's 13.2%, while its operating cash flow and net income margins (21.5% and 17.1%, respectively) significantly outperform broader market averages. These figures are not merely good—they're elite.
Lululemon's balance sheet resembles a fortress. With a debt-to-equity ratio of just 4.9%, it is significantly below the S&P 500 average of 19.9%. Additionally, its cash-to-assets ratio of 26.1% far exceeds the market's 13.8%. This immaculate financial status provides Lululemon with both strength during downturns and the ability to invest in further growth.
There's no way to sugarcoat it: Lululemon has experienced dramatic declines during market corrections. It dropped 46% during the downturn of 2022 (compared to the S&P's 25%), fell 47% in the early 2020 COVID-19 shock (versus 34%), and was extremely affected during the 2008 crash, plummeting 92% (compared to 57%). Investors must recognize that with LULU, strong fundamentals don't necessarily provide protection against sharp changes in sentiment. Our dashboard How Low Can Stocks Go During A Market Crash illustrates how major stocks performed during and after the last six market crashes.
Lululemon checks nearly every box: strong growth, solid profitability, and a fortified balance sheet, with the only drawback being its susceptibility during market downturns. Trading at a slight discount relative to its strong performance profile, the recent Q1 results, which included mixed outcomes and cautious guidance, underscore immediate challenges while preserving the integrity of long-term fundamentals. Nonetheless, you could also consider the Trefis Reinforced Value (RV) Portfolio, which has surpassed its all-cap stocks benchmark (a combination of the S&P 500, S&P mid-cap, and Russell 2000 benchmark indices) to yield strong returns for investors. Why is that? The quarterly rebalanced mix of large-, mid- and small-cap RV Portfolio stocks offered a responsive strategy to capitalize on positive market conditions while limiting losses during downturns, as detailed in RV Portfolio performance metrics.
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