Lululemon Athletica (NASDAQ:LULU) has experienced a couple of setbacks during the past year, with its financial results for the first quarter of 2014 disappointing Wall Street being the most recent setback. The company's earnings declined by a significant margin of 59%, from $0.32 in 2013's first quarter to $0.13 in 2014's. As a result, Lululemon's stock took a dive on the day it reported its earnings and dropped by about 16%. Year to date, Lululemon's stock has been on a steady decline, falling close to 32% in 2014.

LULU Chart

LULU data by YCharts

With Lululemon's stock declining significantly, is now the time to buy? If you believe that risk is more related to the price you pay for stocks than to their historical volatility, then Lululemon might be a good investment at this point.

Lululemon and its competition
Lululemon competes against a number of companies in the athletic clothing market. Some of its major competitors include Nike (NYSE:NKE), The Gap (NYSE:GPS), and Adidas (NASDAQOTH:ADDYY). The following table compares the current valuations of Lululemon and the aforementioned companies.



Forward P/E

5-yr. PEG












The Gap










Data Source: Yahoo Finance & Morningstar

Even with significant declines in 2014, Lululemon does not stand out on a valuation basis against its peers given the valuation metrics explored here. The Gap looks the most attractively valued looking back not only at earnings over the last 12 months but also at cash flow over the last 12 months, with a P/E and P/CF of 16 and 10, respectively.

Adidas, however, "takes the crown" looking at projected earnings over the next 12 months and over the next five years with a forward P/E of 7 and a 5-yr. PEG of 0.6. Stocks with 5-year PEG ratios less than one are considered undervalued and Adidas certainly fits that bill, with The Gap more or less fairly valued considering that criterion. Nike looks overvalued and so does Lululemon, but less so than Nike considering their PEG ratios; nonetheless, neither company looks overly attractive given their 5-year PEG values.

Not attractively valued, but not on a death spiral either
Wall Street did not like Lululemon's 2014 first-quarter results, but the overall financials were not bad at all. The steep decline in earnings was mostly a result of the company repatriating money from overseas, leading to a hefty tax charge in the quarter. Lululemon's earnings before taxes actually increased in the quarter by 6% to $71.44 million from $67.39 million in 2013's first quarter. Excluding the one-time tax charge, Lululemon's earnings actually increased by $0.02 to $0.34 from $0.32 in 2013's first quarter. Moreover, the company's revenue rose by 11% to $384.6 million from $345.8 million in the first quarter of 2013.

Foolish takeaway
Lululemon's recent results are not a harbinger of more misfortune for the company or its stock ahead. Although the company is not rapidly expanding as it had done in the past, it is to be expected as more competitors enter the market for women's athletic clothing and as Lululemon matures and has less room to expand in the U.S.

The stock is not a screaming buy, but it is not a screaming sell either. Given its performance when one digs deeper down into the financials, Lululemon is definitely a better buy now than it was before its most recent decline. At its current price, investors should not get hurt initiating an investment in Lululemon.

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Andrew Sebastian has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica and Nike. The Motley Fool owns shares of Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.