Challenge

Lululemon's stock had fallen over 40% from its peak as investors priced in slowing growth in the Americas and rising tariff costs. We wanted to determine whether that selloff reflected the company's true long-term value — or whether the market was conflating a regional maturation story with a fundamental deterioration.

Approach

We built a bottom-up FCFF DCF model covering 2026–2030, with assumptions stress-tested across revenue, COGS, SG&A, working capital, and capex. Key components included:

• Regional Revenue Breakdown: Separated Americas, China Mainland, APAC, and EMEA to isolate where growth was decelerating versus still expanding — Americas at ~4% near-term vs. China still growing 25%+ YoY.
• COGS & Margin Assumptions: Set COGS growth equal to revenue in 2026 to capture the full tariff shock, then let margins recover as sourcing diversification and international scale kicked in.
• SG&A Projections: Modeled elevated spend through 2027 to reflect supply-chain restructuring and increased marketing, then normalized toward historical averages.
• WACC & Terminal Value: Estimated a 5.4% WACC via CAPM and a conservative 2% terminal growth rate aligned with long-run nominal GDP.
• Economic Profit Crosscheck: Used NOA and ROIC to validate whether the DCF intrinsic value held up under a different profitability framework.

Outcome

The model returned a target price of $240.03 — roughly 31% above the December 2025 close of $183.60. Even with conservative inputs across the board, Lululemon's durable ~58–59% gross margins and underpriced international runway produced intrinsic value well above the market price. The key insight was that the “Power of Three x2” plan — targeting double the men's and digital businesses and quadruple international revenue — was not yet reflected in the stock.