Hook & thesis
Shares of lululemon athletica (LULU) have been punished hard since their 52-week peak of $400.00, and the current market price - roughly $170.12 - now embeds a much cheaper earnings multiple: P/E sits around 12x with free cash flow of about $1.13 billion. That combination argues the equity is materially undervalued on a fundamental basis.
But undervalued does not mean buy-at-any-price. The company is wrestling with a public proxy contest from founder Chip Wilson and complaints about product quality, while its Americas business is soft and margins have been under pressure. My view: the balance of reward-to-risk favors a cautiously constructive trade - a position-sized long that waits for clearer governance or operational signs of stabilization before adding size.
What the company does and why the market should care
lululemon designs, distributes and retails technical athletic apparel, footwear and accessories through company-operated stores and direct-to-consumer channels. The brand has durable pricing power when product quality and consumer perception are intact. The market cares because lululemon has historically converted strong brand loyalty into attractive returns on capital - the company reports return on equity near 38.7% and return on assets around 21.9% - and because its international growth can re-accelerate overall revenue if U.S. demand steadies.
Key fundamentals and why they matter
| Metric | Value |
|---|---|
| Current price | $170.12 |
| Market cap | $21.76B |
| P/E | ~12x |
| EPS (trailing) | $14.84 |
| Free cash flow | $1.128B |
| Enterprise value | $19.59B |
| EV/EBITDA | ~6.7x |
| Current ratio | 2.13 |
| Debt to equity | 0 |
Those numbers deserve emphasis. At roughly $21.8 billion market cap and EV of $19.6 billion, lululemon is trading at valuation multiples that historically have been reserved for businesses with lower growth. Yet the company continues to generate strong cash: free cash flow came in at ~$1.13 billion recently, and profitability ratios remain robust. Balance sheet metrics show minimal leverage - debt to equity is reported at 0 - giving management flexibility to defend margins or return capital once governance and demand issues settle.
Technical and sentiment backdrop
Technicals are mixed-to-bearish: price sits well below the 50-day simple moving average (~$194.93), MACD shows bearish momentum, and RSI is modestly oversold around 38. Short interest has come down materially from early peaks but remains meaningful in dollar terms - a sign that bears still see downside if execution weakens.
Valuation framing
At ~12x earnings and an EV/EBITDA near 6.7x, the stock reads cheap relative to its historical aura as a premium-growth apparel brand. If earnings stabilize and the multiple re-rates modestly to, say, 15x - 16x (not unreasonable for a high-ROE apparel franchise), a mathematically implied price range would be $223 - $238 using recent EPS of $14.84. I'm using $220 as a conservative target that assumes a partial re-rating + some earnings recovery rather than a full return to prior frothier multiples.
Catalysts that could drive the trade
- Resolution or de-escalation of the board proxy contest - if the company outlines a credible plan to address quality and oversight concerns, sentiment should improve.
- Better-than-expected U.S. comp performance or margin stabilization - even modest improvement in Americas trends will boost near-term earnings visibility.
- Continued international strength, particularly in mainland China and other markets where lululemon has reported double-digit growth - that can offset U.S. weakness.
- Evidence management deploys cash/FCF toward shareholder-friendly actions (share buybacks, targeted reinvestment) instead of dilutive or unfocused spending.
Trade idea - actionable plan
Direction: Long (position)
Entry: $170.12
Target: $220.00
Stop loss: $150.00
Position sizing & timing: This is a position trade intended to last up to long term (180 trading days). Expect to hold for a multi-month window - 46-180 trading days - while watching for governance clarity and signs of U.S. demand stabilization. If one prefers a stepped approach, consider building half the intended position on the entry and add the remainder after one of the catalysts above materializes.
Why these levels? Entry equals the current market price, target captures a partial multiple recovery to the mid-teens on EPS of $14.84 with room for additional upside if margins rebound. The stop at $150 limits downside to roughly 12% from entry and sits beneath recent intraday support; it respects the faster short-term trend and keeps risk per position controlled.
Horizon reasoning
Short term (10 trading days): expect noisy price action tied to headlines. This is not an intraday trade.
Mid term (45 trading days): you may see an initial reaction to governance updates or quarterly prints; consider trimming or re-evaluating if the company shows clear deterioration in Americas revenue or guidance is cut.
Long term (180 trading days): the full thesis plays out over months. Governance clarity, margin recovery and international growth trends typically take multiple quarters to influence valuation materially; hold through that window if core fundamentals improve.
Risks and counterarguments
- Governance volatility: The founder's proxy contest and public criticism of product quality (see comments in late January) could prolong investor angst, create board distraction, and slow strategic initiatives. That alone can keep the multiple depressed even if fundamentals are sound.
- U.S. demand weakness: The Americas business has been cited as the weak link. If consumer willingness to pay or traffic drops further, revenue and gross margins could compress materially.
- Tariff and supply-chain pressure: Higher input or logistics costs could squeeze margins even if revenue recovers.
- Execution risk on product quality: Reputational damage from quality issues can depress brand strength and push customers to competitors, lengthening recovery time.
- Macro slowdown: Broader apparel spending weakness would hit discretionary brands first; a recessionary uptick could push multiple lower before recovery.
Counterargument
One could argue the cheap multiple already prices in significant near-term weakness and governance noise; the company’s clean balance sheet (debt-to-equity 0) and strong FCF give it the optionality needed to weather a tough patch. If management resolves board issues quickly and prints even modest better-than-expected comps, the stock could gap higher quickly, making a buy-and-hold position from current levels attractive. That said, relying on quick resolution is speculative, which is why the trade favors a position-sized entry and defined stop.
Conclusion - stance and what would change my mind
Stance: constructive but cautious - initiate a position-sized long at $170.12 with a $150 stop and a $220 target, planned for a 46-180 trading day holding period. The valuation is compelling: P/E ~12x, EV/EBITDA ~6.7x, and robust free cash flow mean upside exists if governance and execution improve.
What would change my mind: a clear management/board resolution or an earnings cadence showing durable U.S. recovery would make me add to the position and potentially lift the target. Conversely, clear deterioration in Americas revenue, widening margin erosion, additional public governance missteps, or a material downward revision to guidance would force me to exit and reassess.
Bottom line: the balance sheet and cash generation argue lululemon is worth owning at the right price, but governance uncertainty and execution risk argue for measured exposure and patience.