TLDR;
This video discusses the significant drop in Lululemon's stock price despite fundamental growth, examining the reasons behind this discrepancy, including concerns about decelerating growth and the fickleness of the fashion industry. It covers the company's financials, buyback program, and historical valuation, and concludes with a reverse discounted cash flow analysis to assess growth expectations priced into the stock. The analyst expresses caution due to the lack of a strong brand moat compared to companies like Nike, despite the stock appearing cheap.
- Lululemon's stock has significantly dropped despite fundamental growth.
- Concerns about decelerating growth and the fickle nature of fashion are impacting investor sentiment.
- The company is aggressively buying back shares, signaling confidence in its valuation.
- A reverse discounted cash flow analysis indicates very low growth expectations are priced into the stock.
- The analyst is hesitant to invest due to the perceived lack of a strong brand moat compared to companies like Nike.
Introduction [0:00]
The video introduces Lululemon's stock performance, noting its decline of nearly 50% year-to-date and over the past six months. Despite fundamental growth, the stock price has not reflected this, influenced by the volatile nature of the apparel industry and changing consumer tastes. The analysis will cover the company's fundamentals, current issues, and a reverse discounted cash flow to assess the growth priced into the stock.
Lululemon's Fundamentals and Growth [1:41]
Lululemon has demonstrated considerable earnings per share growth over the past decade, although the stock price has performed poorly in the last five years. Analyst estimates project continued positive earnings per share growth through 2026, with potential acceleration beyond that. While revenue growth has been significant, there is a noticeable deceleration, which is a concern for investors given the fickle nature of fashion trends. The 10-year compound annual growth rate revenue is 21.22%, accelerating to 22.9% in the past 5 years, but in the past year, the revenue compound annual growth rate is 12.73%.
Financial Health and Buyback Program [3:25]
Lululemon's margins and net income remain strong, with free cash flow also showing positive trends. The company has slightly more debt than cash, but it is not significant relative to its market capitalization, with only $382 million more debt than cash. Lululemon is aggressively ramping up its buyback program, viewing its valuation as cheap. Quarterly buybacks have increased from less than 0.5% to nearly 2% of shares outstanding in late 2024, indicating a strong commitment to returning value to shareholders. The return on invested capital is at 29.23% annual run rate.
Brand Strength and Historical Valuation [4:47]
The analyst emphasizes the unpredictability of fashion brands and their staying power, noting that Lululemon lacks the brand strength of companies like Louis Vuitton, Hermes, and Nike. Historically, Lululemon's valuation is at its cheapest in the past 10 years, with a price-to-earnings ratio of 13 times, significantly lower than the S&P 500. Similar trends are observed in EV/EBITDA and free cash flow yield, with the latter above 5.5%. Even when factoring in decelerated growth, Lululemon's price-to-earnings growth ratio of 1.3 times is the cheapest it has ever been.
Reverse Discounted Cash Flow Analysis and Investment Decision [6:55]
A reverse discounted cash flow analysis reveals that the current stock price factors in less than 1% free cash flow growth, which is very low considering the company's historical growth and future projections. While the stock appears cheap, the analyst will not be buying Lululemon due to concerns about its lack of a strong brand moat and long-term staying power compared to Nike. The analyst acknowledges the stock looks cheap, is pricing in very low free cash flow growth, and the company is buying back a lot of shares, and fundamentally it does look good.