LULU Lululemon Athletica
A cash-rich premium brand priced for permanent decline; even with margins reset lower, intrinsic value exceeds price.
The story
Lululemon is a premium athleisure brand with real pricing power and a loyal community, but its core US business has stalled under competition from Alo, Vuori and others, tariffs, and weaker product freshness, while China and other international markets still grow. It has moved from hypergrowth to early maturity: revenue is flat at about $11.1B and margins are falling from a 23.7% peak as markdowns, tariffs and reinvestment eat into them. The brand is damaged, not broken.
TTM revenue is flat and TTM operating margin has slid to 17.8%, which is in line with my earlier call for margins to settle near 16.5% (still above most apparel peers because of brand pricing power). So the margin, reinvestment and risk drivers stay where they were. I trimmed year-1 growth from 3% to 2% to match the flat top line; that is a small move in dollar terms, and international growth and new products still support low-single-digit growth over the long run.
Value drivers
| Revenue growth (Y1) | 2.0% |
| Terminal growth | 3.0% |
| Forecast horizon | 7y |
| Target operating margin | 16.5% |
| Years to target margin | 3 |
| Sales-to-capital | 2.00 |
| Beta | 1.15 |
| Failure probability | 2.0% |
| Cost of capital (WACC) | 10.5% |
| Terminal WACC | 9.8% |
Valuation bridge
| PV of explicit FCFF | 6.13B |
| PV of terminal value | 9.42B |
| Equity value | 17.01B |
| ÷ shares → per share | $153.68 |
Projected free cash flow to the firm
| Yr | Revenue | Growth | Margin | NOPAT | Reinvest | FCFF | PV |
|---|---|---|---|---|---|---|---|
| 1 | 11.32B | 2.0% | 17.4% | 1.39B | 110.94M | 1.28B | 1.16B |
| 2 | 11.56B | 2.2% | 16.9% | 1.38B | 122.59M | 1.26B | 1.03B |
| 3 | 11.83B | 2.3% | 16.5% | 1.38B | 134.88M | 1.24B | 921.69M |
| 4 | 12.13B | 2.5% | 16.5% | 1.41B | 147.88M | 1.26B | 848.86M |
| 5 | 12.45B | 2.7% | 16.5% | 1.45B | 161.69M | 1.29B | 783.03M |
| 6 | 12.80B | 2.8% | 16.5% | 1.49B | 176.37M | 1.31B | 723.45M |
| 7 | 13.19B | 3.0% | 16.5% | 1.53B | 192.04M | 1.34B | 669.47M |
Key risks
- US comparable sales keep falling as competitors take share from the brand
- Tariffs and promotions push margins below 15% for good
- Execution risk from leadership turnover and activist pressure distracting from product fixes
Catalysts
- Signs that a product refresh is working, with US comps stabilizing and markdowns shrinking
- Buybacks at depressed prices backed by a net-cash balance sheet, or activist-driven strategic change