Decoding lululemon's High P/E Ratio: Bargain Buy or Overpriced Risk?

Core Viewpoint - lululemon athletica inc. (LULU) has shown strong growth through innovative products and brand loyalty, but its current forward 12-month price-to-earnings (P/E) multiple of 21.23X raises concerns about valuation compared to the industry average of 13.55X [1][4]. Valuation Concerns - The price-to-sales (P/S) ratio of lululemon, combined with a low Value Score of D, indicates it may not be a strong value proposition at current levels [2]. - lululemon's P/E ratio of 21.23X is significantly higher than competitors like Columbia Sportswear (20.23X), Ralph Lauren (18.35X), and Crocs Inc. (7.73X), suggesting that LULU's stock valuation is out of step with its growth trajectory [4]. Recent Stock Performance - LULU's share price has increased by 32.4% over the past three months, outperforming the broader industry's 17.6% rise, the Consumer Discretionary sector's 14.4%, and the S&P 500's 11% [6]. - Currently trading at $315.30, LULU reflects a 39.5% premium to its 52-week low of $226.01 and a 38.9% discount from its 52-week high of $516.39 [7]. Growth Drivers - lululemon aims to reach net revenues of $12.5 billion by 2026, up from $6.25 billion in 2021, driven by its Power of Three X2 growth strategy [10]. - The company expects international markets, particularly Mainland China, to contribute nearly 50% of total revenues by 2026, with plans to quadruple international revenues from 2021 levels [10]. - The men's business is also a growth driver, with a goal to double men's sales from 2021 levels, and a reported 11% revenue growth in the men's category in Q2 fiscal 2024 [11]. Challenges - lululemon faces challenges from inflation, which has led to reduced discretionary spending and struggles in its women's category, impacting its Americas business [12]. - A slowdown in the women's category is attributed to fewer updates to core styles, resulting in lower conversion rates [13]. - The company anticipates cautious near-term results due to the lack of new products in the women's category, reflected in its fiscal third-quarter outlook [13][14]. Financial Guidance - For Q3 fiscal 2024, lululemon expects net revenues of $2.34-$2.365 billion, indicating 6-7% year-over-year growth, with EPS projected at $2.68-$2.73 [14]. - For fiscal 2024, the company anticipates net revenues of $10.375-$10.475 billion, suggesting 8-9% year-over-year growth, and EPS of $13.95-$14.15, an increase from $12.77 in fiscal 2023 [15]. Stability of Estimates - Despite soft guidance, estimates for lululemon have remained stable over the past 30 days, with Zacks Consensus Estimates for fiscal 2024 and 2025 indicating 9.2% and 7.5% year-over-year growth in sales, respectively [16]. Investment Rationale - lululemon's premium valuation and challenges in the Americas raise investor concerns, but its international business momentum and strong performance in the men's category present long-term growth opportunities [18]. - Holding onto lululemon stock is considered prudent, with a focus on the execution of its growth strategy and international expansion efforts [19].