Lululemon Athletica Inc (NASDAQ:LULU): A Prime GARP Candidate Aligning with Peter Lynch's Strategy

Lululemon Athletica Inc (NASDAQ:LULU) has become a notable option for investors using the Peter Lynch growth-at-a-reasonable-price (GARP) method. This approach, made famous by the renowned Fidelity fund manager, focuses on finding companies with consistent earnings growth, good financial condition, and fair prices, qualities that let investors join in growth without paying too much for what might happen. Lynch’s system steers clear of speculative stocks for businesses showing controlled growth, earnings, and a solid balance sheet.

Alignment with Peter Lynch Criteria

Lululemon meets a number of key filters of the Lynch method, which favors companies with earnings growth from 15% to 30%, quick enough to push shareholder gains, but not so fast it cannot continue. The company’s five-year EPS growth of 24.37% sits right in this perfect zone, showing a controlled growth path instead of irregular extreme-growth. Also key, Lynch focused on price discipline using the PEG ratio, which changes the P/E ratio for growth. Lululemon’s PEG ratio of 0.57, much lower than the method’s limit of 1.0, implies the market might be pricing its growth story too low compared to earnings.

Financial condition is another key part of the Lynch system. Here, LULU does very well with no debt, doing better than most others in the industry in solvency measures. Its current ratio of 2.28 shows strong liquidity, and a return on equity of 42.14% shows great skill in creating profits from shareholder money. These numbers match Lynch’s liking for companies that are not carrying too much debt and can finance growth from their own operations.

Fundamental Strength and Quality Metrics

Beyond the specific Lynch filters, Lululemon’s wider fundamental picture supports its status as a GARP option. The company gets a good overall fundamental score of 7/10, with very high marks in profitability (9/10) and financial condition (9/10). Its margins, including a 59.34% gross margin and 23.37% operating margin, are near the best in the apparel industry, showing ability to set prices and run efficiently.

While the company does not give a dividend, a typical feature for growth-oriented companies, it makes up for it with very good capital use measures. Return on invested capital (ROIC) of 30.39% shows that management is using resources well to create value. These traits, high profitability, strong margins, and effective capital use, are signs of the quality businesses Lynch liked.

Growth Path and Valuation Context

Lululemon’s growth story continues, though at a slower speed compared to past rates. While revenue growth is predicted to decrease to about 6.76% per year, EPS growth forecasts near 10% still beat many established apparel rivals. This steady growth fits with Lynch’s preference for manageable expansion over large but uncertain profits.

From a price perspective, Lululemon trades at a P/E ratio of 13.96, lower than both the industry average and the S&P 500’s multiple, even with better profitability measures. This difference implies the market might be pricing its quality features too low. The mix of fair multiples, good growth, and high profitability forms a profile that fits well within the GARP investment idea.

Opportunity for Further Research

Lululemon is only one of a few companies now fitting the Peter Lynch investment filters. Investors curious about looking into other options that mix growth, value, and financial strength can view the complete screen here.

For a full review of Lululemon’s financial measures, including complete profitability, condition, price, and growth reviews, readers can see the complete fundamental report.

Disclaimer: This article is for informational purposes only and does not constitute investment advice, a recommendation, or an offer to buy or sell any securities. Investors should conduct their own research and consult with a qualified financial advisor before making investment decisions.