Lululemon $LULU Posts 24% 10-yr EPS CAGR but Trades at Compressed 9.2x EV/EBIT with 46% Upside Potential

In the athletic apparel sector, few companies have demonstrated the sustained earnings power of Lululemon Athletica, with a 10-year compound annual growth rate (CAGR) in earnings per share (EPS) reaching an impressive 24%. This robust track record, however, stands in contrast to the company’s current enterprise value to EBIT (EV/EBIT) multiple of 9.2x, a level that appears unusually compressed relative to historical norms and industry peers. As of 12 August 2025, this valuation dynamic raises intriguing questions for investors about whether market pressures have created a buying opportunity in a business with proven resilience and expansion potential.

Decade of Earnings Momentum

Lululemon’s EPS growth over the past decade underscores its evolution from a niche yoga apparel brand to a global lifestyle powerhouse. Starting from modest bases in the early 2010s, the company has consistently expanded its product lines, geographic footprint, and digital capabilities, driving profitability higher. For context, historical data shows Lululemon’s revenue climbing from approximately $1.4 billion in fiscal 2013 to over $9.6 billion by fiscal 2024, reflecting a compounded growth trajectory that has supported outsized EPS gains.

This growth has been fuelled by several key factors. First, Lululemon’s focus on premium, performance-oriented athleisure has cultivated a loyal customer base, allowing it to maintain pricing power even amid competitive pressures. The company’s expansion into men’s apparel, accessories, and international markets—particularly in China—has diversified revenue streams. For instance, analyst reports highlight how Lululemon’s comparable sales growth, often in the mid-teens on a constant-currency basis, has outpaced many rivals in the consumer discretionary space.

Moreover, operational efficiencies have played a pivotal role. Gross margins have hovered around 58% in recent quarters, bolstered by supply chain optimisations and a shift towards higher-margin digital sales. Free cash flow generation has been equally strong, with figures exceeding $1.6 billion in fiscal 2024, providing ample capital for share repurchases and strategic investments. This financial health has enabled Lululemon to weather economic cycles, including the disruptions of the early 2020s, where e-commerce revenue surged to offset temporary store closures.

Current Valuation in Focus

Against this backdrop of earnings strength, Lululemon’s EV/EBIT ratio of 9.2x as of 12 August 2025 marks a notable departure from its 10-year average, which has typically ranged between 15x and 20x during periods of peak investor enthusiasm. This metric, which assesses enterprise value against earnings before interest and taxes, suggests the market is pricing in subdued growth expectations or heightened risks. Indeed, the stock has endured a sharp decline, with shares trading at $186.44, down over 40% from their 52-week high of $423.32, based on NasdaqGS data.

Comparative analysis amplifies this point. Within the athletic apparel industry, peers like Nike trade at forward P/E ratios around 34x, while Adidas sits at 26x, according to recent market scans. Lululemon’s forward P/E of 12.49x and current-year P/E of 12.67x position it at a discount, potentially undervaluing its growth profile. Analyst models, such as discounted cash flow (DCF) valuations from sources like Alpha Spread, estimate Lululemon’s intrinsic value at around $345 per share, implying a 46% upside from current levels under base-case scenarios that factor in continued EPS expansion.

Yet, this compressed valuation is not without rationale. Recent quarters have shown signs of softening demand in the U.S., Lululemon’s largest market, amid cautious consumer spending and intensifying competition from upstarts like Alo Yoga and established giants. Foreign exchange headwinds and supply chain vulnerabilities, exacerbated by geopolitical tensions, have also pressured margins. For example, fiscal 2025 guidance points to potential gross margin contraction due to these factors, with analysts forecasting EPS of $14.71 for the current year, a modest uptick from the trailing twelve months’ $14.70.

Risks and Opportunities Ahead

Investors weighing Lululemon’s prospects must balance these near-term challenges against longer-term tailwinds. On the risk side, a prolonged U.S. economic slowdown could further erode comparable sales, which have decelerated from 17% year-over-year in early 2023 to more tempered levels recently. Additionally, the company’s reliance on Asian sourcing exposes it to tariff risks, particularly if trade policies intensify. Sentiment from credible sources, such as Seeking Alpha contributors, marks a “Strong Buy” rating, citing the valuation as a buffer against these headwinds, though they acknowledge real concerns over demand shifts.

Conversely, opportunities abound in international expansion and product innovation. China’s market, where Lululemon operates alongside regions like Canada and other geographies, has shown resilience with double-digit growth. Initiatives like the men’s category push and potential refreshes in core lines could reignite U.S. momentum. Analyst-led forecasts project a 10-15% revenue CAGR over the next five years, supporting EPS growth in the high teens, which would justify a re-rating of the EV/EBIT multiple back toward historical averages.

Investor Implications

For long-term investors, Lululemon’s blend of historical EPS compounding at 24% CAGR and a current EV/EBIT of 9.2x presents a compelling case for undervaluation. The company’s market cap of $22.3 billion, against a book value per share of $35.74 and a price-to-book of 5.22x, further underscores this. While short-term volatility—evidenced by a 52-week range spanning $185.95 to $423.32—may persist, the underlying business metrics suggest durability.

In a sector prone to fashion cycles, Lululemon’s brand moat and cash-rich balance sheet (with no debt) offer a margin of safety. Dry humour aside, if the market continues to treat this growth story like last season’s leggings, patient capital could find itself well-positioned for a rebound. As always, diversification and due diligence remain key, but the data points to a narrative of resilience over capitulation.

References

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