Is Lululemon (LULU) a good buy before its earning?

Lululemon Athletica (Lulu) shares had been down 46.8% Year to date, at the time of writing, it is one of the worst performance stocks this year. Is Lulu still a good company to invest before it announce its earning on 29 Aug 2024? Let us find out in this article.

Analysis of Lululemon Athletica (LULU) Using STORM Framework

1. Business Model

Introduction: Lululemon Athletica is a premium athletic apparel company known for its high-quality, performance-focused clothing. Founded in 1998 and headquartered in Vancouver, Canada, Lululemon has grown to become a global leader in the athleisure market.

Business and Services: Lululemon’s core business revolves around the design, production, and retail of athletic wear, including yoga pants, shorts, tops, and jackets. The company operates through retail stores, e-commerce, and direct-to-consumer channels. Lululemon has also expanded into men's apparel and accessories, further diversifying its product portfolio.

Source of Income: The company generates revenue primarily through the sale of its products in retail stores and online. In 2023, Lululemon reported significant revenue growth, driven by strong demand across all regions and product categories. The company also benefits from a high-margin business model due to premium pricing.

Market Position: Lululemon holds a strong market position within the premium athletic wear segment. The brand is recognized for its high-quality, innovative products, and has built a loyal customer base. The company continues to expand globally, increasing its market share in both established and emerging markets.

Competitors: Key competitors include Nike, Adidas, Under Armour, and other athletic wear brands. Lululemon also faces competition from emerging direct-to-consumer brands.

2. Economic Moat

Branding Power (9/10): Lululemon has built a powerful brand synonymous with quality and performance. The brand’s strong customer loyalty and premium positioning give it a substantial competitive advantage.

Network Effect (6/10): Lululemon benefits moderately from network effects through its community-based marketing, such as yoga classes and brand ambassadors, which enhance brand loyalty and customer engagement.

Market Leadership (8/10): Lululemon is a leader in the premium athleisure market, with a strong global presence and a reputation for innovation and quality.

Switching Costs (5/10): Switching costs for customers are relatively low, as they can easily choose other brands. However, Lululemon’s strong brand loyalty and product quality reduce the likelihood of customers switching.

Trade Secrets and Patents (6/10): While Lululemon has some proprietary technologies and designs, these are not the primary source of its competitive advantage.

Economies of Scale (7/10): Lululemon’s growing global footprint allows it to achieve economies of scale in production and distribution, leading to cost efficiencies and higher margins.

Overall Economic Moat Score: 6.8/10

3. Risks

• Market Saturation: Potential saturation in core markets could slow growth.

• Competition: Intense competition from both established brands and new entrants.

• Supply Chain Disruptions: Dependence on third-party manufacturers and global supply chains poses risks.

• Economic Downturn: Premium pricing may be less attractive during economic downturns.

4. Future Growth Potential and Opportunities

• International Expansion: Continued growth in international markets, especially in Asia.

• Product Diversification: Expanding product lines into new categories such as footwear and personal care.

• Digital Expansion: Strengthening e-commerce and digital engagement strategies.

• Sustainability Initiatives: Investing in sustainable materials and practices to appeal to environmentally-conscious consumers.

5. Financial Strength

• Consistent Increase in Sales: Lululemon has shown consistent growth in revenue and net income.

• Consistent Increase in Net Income: The company has also reported consistent increases in net income, reflecting strong operational performance.

• Consistent Increase in Free Cash Flow: Although there was a dip in 2023 first quarter, Lululemon still posed consistent growth in operating cash flow and Free cash flow in the past 5 years.

  

• Low Debt Level: Lululemon Debt-to-Equity ratio of 0.33, is considered low.

  
  

6. Valuation

• PE Ratio: Lululemon’s current PE ratio is at the lowest compared to its past 5 years historical PE ratio.

  

• PEG Ratio: A lower PEG ratio would indicate undervaluation relative to its growth prospects. According to Gurufocus, PEG ratio is below 1, indicate the growth is faster than it PE ratio, under-value.

• PB Ratio: The price-to-book ratio is more for asset based business, and not so appropriate for Lululemon.

  

• Intrinsic Value

  1. Gurufocus

     The intrinsic value from Gurufocus is $490.10. At current price it is significantly under-value.

     

  2. Simplywall.st

     The intrinsic value from Simplywall.st is $409.67, indicate the stocks is 34.4% under-value.

  

  The intrinsic value of Lululemon is between $409.67 (Simplywallst) and $490.10, indicating the current stock price is significantly under-value.

6. Technical Analysis

Let us take a look at the chart of Lululemon. In the long run, the stocks is still in the down-trend. But the stocks recently re-bounced back from the $255 price level and climbed steadily towards the 50 Moving average level, acting as overhead resistance.

If the earnings are good from the earnings report, the stocks will have a chance to break above this resistance. However, if the earning is disappointing, it will fall from overhead resistance.

Conclusion

Lululemon Athletica possesses a strong economic moat supported by its powerful brand, market leadership, and economies of scale. The company’s consistent financial performance, including robust sales growth, increasing net income, and strong free cash flow, positions it well for continued success in the competitive athleisure market. Although risks such as market saturation and competition exist, Lululemon's strategic focus on international expansion, product diversification, and digital growth provides significant future growth potential.

In terms of valuation, the current share price of Lululemon indicates it is under-value and has over 30~40% safety of Margin.

Overall, Lululemon is well-equipped to maintain its competitive advantage and deliver long-term value to shareholders. Do your own due diligent, decide how long is your investment horizon, and whether you have the patience for the stock market realize the true value of the company, before investing.