It's been something of a rollercoaster ride for Lululemon's (LULU 1.37%) stock lately. Early this year, the shares had been plunging from record highs of close to $500 in late 2021. More recently, they have rallied after the company reported extremely strong results on its earnings call with analysts. Today, Lululemon carries a share price of $391, translating to a market capitalization of $48 billion.
The company continues to make noise in the athletic apparel industry. At one point labeled a fad by some, the business has proven that it's here to stay and should maintain robust growth in the years ahead. Over the past five years, Lululemon has rewarded its shareholders with a 663% gain, more than six times that of the S&P 500's 106% return over the same time period.
Long-term investors should consider Lululemon stock as this is a company that looks likely to outperform the market for many years to come.
Image source: Getty Images.
Superior fundamentals
Overall, Lululemon performed exceptionally well in 2021. The company ended the year with a top line and bottom line of $6.3 billion and $7.79 per share, representing 42% and 66% growth, respectively. Lululemon's balance sheet is superb -- the company boasts more cash than debt and has a debt-to-equity ratio of only 32%. Its strong cash position, combined with its lack of leverage, offers Lululemon financial security as well as flexibility to expand its operations.
Meanwhile, free cash flow jumped 73% in 2021 to $994.6 million. Over a span of three years, the company has increased its free cash flow at a compound annual growth rate (CAGR) of 24%.
Looking ahead, analysts are modeling revenue and earnings of $7.4 billion and $9.25 per share this upcoming year, which translates to 19% year-over-year growth for both metrics. The company's future runway for growth is tremendous. Total revenue generated in the global sports apparel industry is forecast to reach $268 billion by 2028, up from $193 billion in 2021. Considering that Lululemon only controls 6% of the market today, the company's opportunity for expansion is robust.
As of its most recent quarter, Lululemon has 574 total stores. In the fourth quarter of 2021, the company opened 17 new stores in Asia Pacific, three in North America, and two in Europe. The opportunity for foreign development is enormous -- Lululemon enjoyed international sales growth of 35% in 2021 and continues to place an emphasis on widening its global reach.
A premium valuation
On the surface, Lululemon's valuation appears off the charts. The company is trading at 52 times earnings today, which is nearly 1.5 times higher than its closest competitor, Nike (NKE 0.39%), which bears a price-to-earnings multiple of 35.
That said, Lululemon has historically traded at a premium relative to its industry counterparts. In fact, the company's current price-to-earnings multiple is indeed lower than its five-year average of 54.
LULU PE Ratio data by YCharts
Likewise, when you examine the PEG ratio of both companies -- showing the price of a stock relative to its earnings growth -- you'll notice that Lululemon doesn't seem so expensive. According to data from Morningstar, Lululemon and Nike have almost identical PEG ratios with each stock trading around 2.2 times growth of the earnings per share. I'll also argue that Lululemon deserves a premium valuation due to its superior margins. The company's gross margin, EBITDA margin, and net margin all surpass Nike's numbers.
| Metric | Lululemon | Nike |
|---|---|---|
| Gross margin | 58% | 46% |
| EBITDA margin | 26% | 17% |
| Net margin | 16% | 13% |
Data sources: Lululemon Athletica and Nike.
Given its leading growth, supreme margins, and historical range of its price-to-earnings multiple, Lululemon is trading at an acceptable valuation level today.
Buy and hold this gem
Lululemon has demonstrated its ability to be successful in the past, but I'm most excited about where this company is heading. Lululemon's financial statements are the perfect trifecta -- the company has set itself up for massive growth in the future.
At first glance, the stock looks expensive. But when you explore the situation in more detail -- taking into account historical valuation, growth, and relative margins -- you'll find that Lululemon's valuation isn't so bad after all. Long-term investors can feel comfortable owning this stock as the company is well-equipped to continue its impressive run into the future.
