Shares of Lululemon Athletica Inc. (LULU) are down 19.8 percent year to date as of June 2017 after a poorly received earnings report in March. The stock recouped some of these losses following its first quarter earnings in June, which drove an 11 percent jump overnight. This volatility indicates divergent valuations among investors, and it is unlikely that the underlying fundamentals of the business are fluctuating so rapidly. This could indicate an entry opportunity for long-term investors, depending on the fundamental outlook and the new valuation.

Chart showing Lululemon's revenue for the past decade

Lululemon has achieved sustained high revenue growth. The company's 10-year average sales growth rate was 31.7 percent through January 2017, and the five-year figure was 18.6 percent. Sales were $270 million in 2007, and the top line has reached an all-time high at $2.37 billion over the trailing 12 months. The company exceeded analyst sales forecasts by 1.5 percent in the first quarter of 2017, with a 5 percent year-over-year increase despite difficult demand conditions. Analysts expect a return to double-digit growth in the coming years. (See also: Lululemon's Q1 Beat: Why It's Still No Turnaround.)

Chart showing Lululemon's gross margin history over the past decade

The company has experienced some volatility on the gross margin line, which has ranged from 48.4 percent to 56.9 percent over the past decade. Pricing power, product mix and sales channel mix all play roles in gross profitability. Gross margin has been trending positively, and it currently sits at the 10-year median level.

Chart showing Lululemon's margins and returns over the past decade

Lululemon experienced margin erosion from 2011 to 2015, but it appears to have stabilized since. The company lost 10 percentage points on the operating margin line and 7.5 percentage points on the net margin line during that slide. After adjusting for a non-cash asset impairment charge in the first quarter of 2017, the company reported an operating margin improvement 50 basis points for the quarter. The company also has a superior margin profile compared with its closest industry peers. (See also: Lululemon Reverses Decline With Breakout.)

Chart showing Lululemon's profit metrics for the past decade

Lululemon's profit trends have been favorable despite the fluctuations in margins. Operating income and free cash flow did not exhibit growth in 2014 and 2015, but 2016 saw a return to expansion. The company has delivered free cash flow growth, but capital spending related to footprint growth and improvement has depressed cash flow relative to accounting profits.

Chart showing Lululemon's efficiency ratios for the past decade

Table comparing Lululemon's operating metrics with those of its peer group

Lululemon has displayed mixed results for efficiency metrics. Inventory turnover has deteriorated, while asset turnover has remained stable. The company's cash conversion cycle has risen since 2012, largely due to slowing inventory turnover. Despite these lackluster trends, Lululemon still maintains a slight advantage over peers in these categories. (See also: Understanding the Cash Conversion Cycle.)

Chart showing Lululemon's financial health over the past decade

Lululemon has excellent financial health metrics, which indicates limited risk to investors due to leverage or liquidity. The company's equity multiplier is only 1.19, indicating little debt financing in the capital structure. The company's current ratio is 5.5, and its quick ratio is 3.44, both of which are well above the required levels even for the most risk-averse investors. These short-term assets could be used to safeguard against protracted downturns or to stimulate growth if the organic business reaches maturity. (See also: What Is the Best Measure of a Company's Financial Health?)

Chart comparing Lululemon's valuation with its peer group

Investors hoping to gain exposure to Lululemon will have to pay a premium, but there are several enticing elements of its valuation. A higher growth outlook, superior margins, better operating efficiency and strong financial health command a premium. This is evident in the price-to-book, price-to-earnings, forward P/E and price-to-free-cash-flow ratios, all of which are substantially higher than the peer group average. Lululemon is also one of the few companies in its group that does not pay a dividend, which changes the types of investors to whom this stock would appeal. However, Lululemon is in line with peers based on the PEG ratio, which adjusts P/E for growth forecasts, and enterprise-value-to-EBITDA, which adjusts for capital structure disparities.

It is hard to call Lululemon a cheap opportunity even after its declines, and it is somewhat speculative in its implied growth assumptions. However, Lululemon could be attractive to bullish investors who want exposure to growth in the sector. (See also: Understanding Lululemon's Business Model.)

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.