Lululemon (LULU) is well known as a retailer of high quality “athleisure” clothing. The fact that its products are proprietary along with their brand reputation allows them to sell at very lucrative margins, suggests Shawn Allen, contributing editor to Internet Wealth Builder.

While head office is in Vancouver and its design activities are centered there, lululemon is registered as a US company and trades on Nasdaq, not in Toronto. It has over 500 company-operated stores in 17 countries.

The locations of the stores are 60% in the US, 12% Canada, 11% China, 6% Australia, 3% United Kingdom, and 8% spread over 12 countries. In 2020, 69% of revenue was from women's wear and 86% of revenue was from North America.

This stock has risen spectacularly over the years and particularly since 2014 when it started the year at $59.03. In 2020 it rose 50% and was up another 12% in 2021. Considering the impact of the pandemic on retailers, this was certainly a very strong performance. However, in 2022 to date it is down 18.9%.

Revenue and earnings per share growth was extremely strong in the first three quarters of the fiscal year that ended January 31. This was partly a rebound from the pandemic, but it also continued the long-term growth trend.

The company added 31 stores in the first nine months of 2021, raising the store count by 6%. The net store count was increased by 6% in 2020 and 70% of the net additions were outside of North America.

During the pandemic, the company was successful in moving sales to its online platform. In 2020, it acquired MIRROR, an online fitness business, at a net cost of $453 million. Of that, $363 million was paid for goodwill.

The price to book value ratio is unattractively high at over 15 times — although this may possibly be justified by the high ROE and high growth. The trailing adjusted earnings p/e ratio is very high at 44 and the forward p/e based on the company’s projected 2022 earnings is also very relatively high at 35.

The ROE is very strong at 38%. Revenue per share growth in the past five fiscal years has averaged 18% and earnings per share growth has averaged 20%. This is despite the impact of the pandemic. Overall, while the ROE is proof that this is a very profitable company, the value ratios suggest that the shares may be about fully valued.

The company is projecting to report an earnings per share increase of about 30% for the fourth quarter. Analysts are expecting an earnings per share growth of about 25% in 2022. It’s a relatively safe bet that lululemon will continue to grow its earnings over the years.

Lululemon is certainly a high-quality company. But due to its high valuation, the share price can be expected to be relatively volatile.  While this stock is expensive in relation to earnings, it has a strong history of growth that seems likely to continue. The recent dip in the share price may represent a reasonable buying opportunity.

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