Lululemon's Stock Is Still A Great Bargain

Investors looking for bargains in a gloomy and doomy Wall Street may want to take a close look at the shares of Lululemon Athletica Inc. The company creates a great deal of value as it grows and is still trading well below its fundamental value.

Food and energy inflation may have stopped consumers from buying many discretionary items, but not Lululemon's merchandise, which was in strong demand in the second quarter.

On Thursday afternoon, the company reported strong Q2 2022 financial top-line and bottom-line results ahead of analyst estimates. Net revenue climbed at an annual rate of 29%, reaching $1.9 billion. Moreover, comparable sales rose at a yearly rate of 23%, while direct-to-consumer sales rose 30%. Meanwhile, the company gave upbeat guidance for Q3 2022, expecting net revenue from $1.780 billion to $1.805 billion. That would mean a three-year compound annual growth rate of roughly 25%. In addition, EPS is expected to be in the range of $1.90 to $1.95 for the quarter.

Management credited the company's solid performance to four things, innovation, community activations, omni experience and employee enthusiasm for the brand. "I would like to express my gratitude to our teams around the world for their continued dedication and enthusiasm for our brand, which enabled us to generate this elevated level of performance," Calvin McDonald, chief executive officer, said in a press release that accompanied the financial results. "As we look ahead, we're excited about our ability to successfully deliver against our Power of Three ×2 growth plan and create ongoing value for all our stakeholders."

That's a plan the company developed three years ago to spread and maintain the WOM and buzz for the brand. It includes introducing innovative products across sales channels, like new product lines supporting yoga, running and training activities and an office/travel/commute category while pursuing new opportunities, such as self-care. In addition, it fostered partnerships and communities across geographic regions.

Wall Street liked what it saw in Lululemon's earnings report, sending its shares close to 10% in after-hours trade, helping shake off the gloom and doom sentiment. That dominated trade since the Fed's dire message on interest rates during the Jackson Hole meeting at the end of last week.

Despite the big jump, Lululemon's shares, currently at $323, are trading at a deep discount to the company's fundamental or intrinsic value, which stands at $509, according to GuruFocus estimates. Perhaps, Wall Street has been too pessimistic about companies that sell discretionary items, as higher rates may push the U.S. economy into recession.

Still, Lululemon has an unusually high Economic Value Added (EVA) rate, which generates significant value for its capital holders even if it grows slowly. For instance, according to GuruFocus estimates, in 2022, Lululemon's EVA was 25% compared to 23% of Nike's.