This Hot Growth Stock Is Still a Buy After Enormous Gains

With a stock price up over 300% in the past five years, you might think you missed your chance with Lululemon Athletica (LULU 0.88%). That feeling would have been amplified by the recent news from the company that described a tougher selling environment right now in the athleisure industry.

Lululemon isn’t nearly done expanding, though, and there are many paths the company can take as it builds on its current annual revenue level of roughly $8 billion. With that prospect in mind, let’s look at a few reasons why Lululemon is still an attractive stock today.  

Lululemon has excellent growth trends

Lululemon’s operating results through late September were stellar. Comparable-store sales were up a blazing 25% after accounting for currency exchange rate shifts. Management’s updated outlook calls for that positive momentum to continue into early 2023, with 2022 fiscal-year sales likely rising between 25% and 27% year over year in Q4. “We are pleased with our continued revenue growth,” CEO Calvin McDonald said in a press release regarding the Q4 earnings.

Sure, that announcement also contained signs of increasing price pressures. Lululemon is projecting that gross profit margin will decline by about 1 percentage point in Q4 after having steadily increased for several years.

But context is important here: That 1 percentage point drop will likely put gross margin at about 57% of sales, which is still far above Nike’s (NKE 0.84%) current level of 43%. Lululemon also raised its full-year profit outlook because management found room to cut operating costs. Operating margin is hovering close to 20% of sales, compared to Nike’s 13% figure.

The future for Lululemon

Lululemon is likely to face a tougher selling environment this year. Consumers might be less eager to spend heavily on athleisure apparel, especially if the economy tips into a recession. Zoom out, though, and you’ll see a clear path toward the $10 billion annual sales mark.

Lululemon is pushing into new markets, and its international business grew at almost double the U.S. rate in recent months. Its brand strength translates well in niches outside of yoga, too, including outerwear, menswear, and footwear.

Lululemon is winning in these new categories while expanding its market share in its core niches. That factor helps explain why the company is on track to cross $8 billion in sales this year, compared to $4 billion in fiscal 2020.

The price is right

Meanwhile, Wall Street’s focus on the next few months opened an opportunity for investors seeking many years of market-beating gains. Lululemon’s price-to-sales valuation dropped to near a five-year low. The stock can be bought today for around 5 times revenue, or only a slight premium compared to Nike.

Lululemon has been growing faster than Nike and is consistently far more profitable. As a result, today’s valuation is likely to translate into excellent returns for investors willing to hold through the volatility that might stretch deeper into 2023. In short, this growth stock isn’t nearly done impressing shareholders with its sales and earnings power.

Leave a Reply

Your email address will not be published. Required fields are marked *