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lululemon athletica inc. LULU has maintained its growth trajectory through innovative products and strong brand loyalty. However, the company’s current forward 12-month price-to-earnings (P/E) multiple of 21.23X raises concerns about whether the stock's valuation is justified. This multiple is significantly higher than the Zacks Textile - Apparel industry average of 13.55X, making the stock appear relatively expensive.

The price-to-sales (P/S) ratio of lululemon, which is a distinguished name in the athleisure and high-performance sportswear industry, adds to investor unease especially considering its low Value Score of D, which suggests that it may not be a strong value proposition at current levels.

lululemon’s Premium Valuation Surpasses Peers

At 21.23X P/E, lululemon is trading at a valuation much higher than its competitors. Its competitors, such as Columbia Sportswear COLM, Ralph Lauren RL and Crocs Inc. CROX, are delivering solid growth and trade at more reasonable multiples. COLM, RL and CROX have forward 12-month P/E ratios of 20.23X, 18.35X and 7.73X — all significantly lower than lululemon. At such levels, LULU’s stock valuation seems out of step with its growth trajectory.

The stock’s premium valuation suggests that investors have strong expectations for lululemon’s growth potential. However, the stock currently seems somewhat overvalued. As a result, investors might be hesitant to buy at these elevated levels and prefer to wait for a more favorable entry point.

While LULU’s share price has risen 32.4% in the past three months after witnessing significant declines since the start of 2024, many investors are questioning whether the recent recovery presents a buying opportunity. After the recent recovery in the past three months, the lululemon stock has outpaced the broader industry’s 17.6% rise. The stock also outperformed the Consumer Discretionary sector’s growth of 14.4% and the S&P 500’s rally of 11% in the same period.

LULU’s 3-Month Price Performance

Currently trading at $315.30, the stock reflects a 39.5% premium to its 52-week low mark of $226.01 and a significant 38.9% discount from its 52-week high of $516.39.

The technical indicators show that the stock is trading above its 50-day moving average, indicating strong upward momentum and suggesting sustained investor confidence in the company's performance.

lululemon’s Stock Trades Above 50-Day Moving Average

Understanding LULU’s Growth Drivers Vs. Ongoing Challenges

While investors may be concerned about lululemon’s pricey valuation, its recent share price recovery and positive technical indicators show that the stock still attracts favorable sentiment. However, it is wise to closely evaluate whether the stock is worth buying at current prices.

LULU’s growth prospects are clear from its progress on the Power of Three X2 growth strategy. As part of the plan, the company is expected to reach net revenues of $12.5 billion by 2026, implying significant growth from the $6.25 billion reported in 2021.

lululemon is also poised to benefit from the strong business momentum in its international markets, including Mainland China and the Rest of the World, as the brand connects well with customers globally. The company is optimistic about its potential in Mainland China, where it is expanding its stores and e-commerce platforms. Over the long term, it expects its international business to represent nearly 50% of its total revenues. It is on track to quadruple international revenues from the 2021 reported levels by the end of 2026.

The men's business is another growth driver for LULU. As part of its Power of Three X2 strategy, lululemon aims to double men's sales from the 2021 reported level. In second-quarter fiscal 2024, the men's category saw 11% revenue growth, with standout items like the Zeroed In line, Pace Breaker shorts and Zero polo performing well. The company plans to build on this momentum with new styles and greater inventory investments.

What’s Still Not Right at lululemon?

lululemon has recently faced challenges due to inflation, leading to reduced discretionary spending and struggles in its women’s category, which impacted its Americas business. Rising inflation and higher interest rates have caused consumers to be more selective with discretionary purchases, a significant challenge for luxury brands like lululemon, especially in the United States.

LULU experienced a slowdown in the women’s category, led by fewer updates to core and seasonal styles, such as color, print and silhouette changes. This reduced newness limited fresh options for female customers, leading to lower conversion rates.

Despite confidence in its innovation pipeline and long-term recovery prospects, lululemon expects near-term results to be impacted by the lack of new products in the women’s category, as reflected in its fiscal third-quarter outlook.

Although the company expects to replenish inventory by the second half of fiscal 2024, it provided a cautious view for third-quarter fiscal 2024. Management anticipates net revenues of $2.34-$2.365 billion, indicating 6-7% year-over-year growth. EPS for the fiscal third quarter is expected to be $2.68-$2.73, whereas it reported an adjusted EPS of $2.53 in the prior-year quarter.

For fiscal 2024, LULU anticipates net revenues of $10.375-$10.475 billion, suggesting 8-9% year-over-year growth and a 6-7% rise, excluding the 53rd week in 2024. The company expects a 3% impact on revenues from a shorter holiday season in fiscal 2024. It projects an EPS of $13.95-$14.15, suggesting an increase from the $12.77 reported in fiscal 2023.

Stable Estimates for LULU

Despite the company’s soft guidance, estimates for lululemon have shown stability in the past 30 days. The Zacks Consensus Estimate for LULU’s fiscal 2024 and 2025 earnings per share was unchanged in the last 30 days.

For fiscal 2024, the Zacks Consensus Estimate for LULU’s sales and EPS implies 9.2% and 9.8% year-over-year growth, respectively. The consensus mark for fiscal 2025 sales and earnings indicates 7.5% and 7.8% year-over-year growth, respectively.

Find the latest EPS estimates and surprises on Zacks Earnings Calendar.

LULU’s Investment Rationale

lululemon’s premium valuation and headwinds in the Americas concern investors. Though the company's bleak guidance is somewhat disappointing, its international business momentum and strong performance in the men’s category present a long-term growth opportunity for the LULU stock. Moreover, the stock’s overvalued stature can be linked to the company's long-term growth potential, supported by strong profitability and global expansion.

Holding on to the lululemon stock is the most prudent strategy at the moment. Investors should monitor how LULU executes its Power of Three X2 growth strategy and international expansion efforts, and whether these investments translate into stronger growth in the years ahead. While the stock may face near-term volatility, its long-term potential makes it worth holding on to for now. lululemon currently carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

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