Buy Lululemon and watch your money grow

It’s been kind of a roller coaster for lululemonit is ( LULU 3.77% ) stock lately. Earlier this year, shares fell from an all-time high of nearly $500 at the end of 2021. More recently, they rallied after the company reported extremely strong results in its earnings call with the analysts. Today, Lululemon has a stock price of $391, which translates to a market capitalization of $48 billion.

The company continues to make a splash in the sportswear industry. At one point, called a fad by some, the company proved it was here to stay and should maintain robust growth in the years to come. Over the past five years, Lululemon has rewarded shareholders with a 663% gain, more than six times that of the S&P500106% over the same period.

Long-term investors should consider Lululemon shares as it is a company that looks likely to outperform the market for many years to come.

Image source: Getty Images.

Higher Fundamentals

Overall, Lululemon delivered an outstanding performance in 2021. The company ended the year with revenue and net income of $6.3 billion and $7.79 per share, a growth of 42% and 66%, respectively. Lululemon’s balance sheet is superb – the company has more cash than debt and has a gearing ratio of just 32%. Its strong cash position, combined with its lack of leverage, provides Lululemon with financial security as well as flexibility to expand operations.

Meanwhile, free cash flow jumped 73% in 2021 to $994.6 million. Over a three-year period, the company grew its free cash flow at a compound annual growth rate (CAGR) of 24%.

Looking ahead, analysts forecast revenue and earnings of $7.4 billion and $9.25 per share for the coming year, translating to 19% year-over-year growth. the other for both measurements. The company’s future growth path is great. Total revenue generated in the global sportswear industry is expected to reach $268 billion by 2028, up from $193 billion in 2021. Given that Lululemon only controls 6% of the market today, the company’s expansion opportunities are solid.

As of its last quarter, Lululemon has 574 stores in total. In the fourth quarter of 2021, the company opened 17 new stores in Asia-Pacific, three in North America and two in Europe. The overseas development opportunity is huge – Lululemon saw international sales growth of 35% in 2021 and continues to focus on expanding its global reach.

Premium valuation

On the surface, Lululemon’s valuation appears off the charts. The company today trades at 52 times earnings, nearly 1.5 times more than its closest competitor, Nike (NKE 2.72% )which has a price/earnings multiple of 35.

That said, Lululemon has historically traded at a premium to its industry peers. In fact, the company’s current price-to-earnings multiple is indeed lower than its five-year average of 54.

Table of LULU PE ratios

LULU PE report given by Y-Charts

Similarly, when you look at the two companies’ PEG ratio – showing a stock’s price versus its earnings growth – you’ll notice that Lululemon doesn’t seem that expensive. According to Morningstar data, Lululemon and Nike have nearly identical PEG ratios, with each stock trading around 2.2x earnings per share growth. I will also argue that Lululemon deserves a higher valuation because of its higher margins. The company’s gross margin, EBITDA margin and net margin all exceed Nike’s figures.

Metric lululemon Nike
Gross margin 58% 46%
EBITDA margin 26% 17%
The net margin 16% 13%

Data sources: Lululemon Athletica and Nike.

Given its peak growth, supreme margins, and historical range of its price-earnings multiple, Lululemon is trading today at an acceptable valuation level.

Buy and keep this gem

Lululemon has demonstrated its ability to succeed in the past, but I’m very excited about where this company is headed. Lululemon’s financials are the perfect trifecta – the company has prepared for massive growth in the future.

At first glance, the stock looks expensive. But when you explore the situation in more detail – considering historical valuation, growth and relative margins – you’ll find that Lululemon’s valuation isn’t so bad after all. Long-term investors can feel comfortable owning these stocks, as the company is well-equipped to continue its impressive run into the future.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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