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Has lululemon athletica (LULU) Fallen Below Fair Value on Cash Flow?

Simply Wall St · 3d ago

lululemon athletica has seen its share price come under heavy pressure, and the key issue now is whether that reset lines up with the cash the company can generate. With the focus shifting from brand heat to hard numbers, the question is how today’s valuation stacks up against its underlying cash flows.

  • Over the past 5 years the stock has fallen 74.4%, which raises the question of whether investors are now pricing in a very different long term cash flow profile than before.
  • Fresh scrutiny on founder Chip Wilson’s roughly US$930 million stake, given a high profile divorce and the possibility of ownership changes, may affect how investors think about future board influence, capital allocation and ultimately the reliability of lululemon athletica’s cash generation story.
  • What if you looked at lululemon athletica through its earnings instead? See why lululemon athletica's 7.9x P/E tells a different valuation story.

For investors, the debate is whether the current share price of lululemon athletica is properly supported by the intrinsic value suggested by its cash flows.

If you want to test the same cash flow question you are asking of lululemon athletica across other potential ideas, scan through the 32 high quality undervalued stocks

Has lululemon athletica Run Too Far on Cash Flow?

The Discounted Cash Flow (DCF) model here uses lululemon athletica’s projected free cash flows to gauge what the stock might be worth relative to its current trading level. The latest twelve month Free Cash Flow sits at about $1.28b, and the forecast path in this DCF assumes that cash generation steps down from that base over the coming years rather than compounds aggressively.

Those projections, when discounted back, point to an intrinsic value that the DCF estimates as meaningfully below the current share price of $100.58. The recent spotlight on founder Chip Wilson’s roughly $930 million stake because of his divorce helps explain why investors may be cautious about putting a higher multiple on those future cash flows. For a closer look at how the estimated value compares with the current quote, you can review the full DCF output and assumptions in the detailed valuation report. Find out what lululemon athletica could be worth using our Discounted Cash Flow (DCF) estimate.

The lululemon athletica Narrative: What Would Justify Today's Price?

Simply Wall St Narratives pick up where lululemon athletica's valuation puzzle leaves off by spelling out which assumptions on future growth, margins and earnings would need to hold for the stock to be worth materially more or less than today's price on the Community page. Each one sets out a fair value as a thesis about lululemon athletica's business that you can revisit over time and see how it holds up against new information.

Community views on lululemon athletica’s value split cleanly, with one side calling it boringly cheap and the other arguing the reset has further to run.

Bull case: 28% undervalued

"A premium athletic apparel brand earns a 24% return on invested capital. It generates roughly $920 million of free cash flow..."

Discover why this Narrative puts lululemon athletica at 28% undervalued.

Bear case: 129% overvalued

"Slowing growth in key North American markets signals rising saturation, with management guiding to flat or declining revenues in the U.S. and Canada..."

Explore why this Narrative puts lululemon athletica at 129% overvalued.

One more check on lululemon athletica sits with who is in charge

Before you stop at the share price and cash flow debate, it is worth asking who is steering lululemon athletica and how their pay packets line up with your interests. See who runs lululemon athletica and how they are paid.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.