Down 20% in 2022, is Lululemon stock a buy?

Lululemon Athletica (LULU -3.95%) has been one of the fastest growing sportswear retailers in recent history. It weathered the pandemic with ease and continued to open new brick-and-mortar stores as other clothing retailers closed struggling stores to cut costs. It’s also still on track to deliver double-digit sales growth for the foreseeable future.

Yet Lululemon’s stock is down more than 20% again this year as inflation, rising interest rates and other macro headwinds pushed major indexes into a grueling bear market. But does Lululemon’s pullback represent a good opportunity to buy shares of its top-flight stock – which has still risen more than 400% in the past five years?

Image source: Getty Images.

Lululemon Highlights

Lululemon first carved out a defensible niche in the crowded sportswear market by selling high-end yoga apparel for women. He also locked in some of those customers with free yoga classes and other activities. Lululemon then expanded its reach with other types of sportswear, menswear, and even footwear. It also acquired Mirror, a maker of connected fitness mirrors for remote workouts, in 2020.

just like Nike (NKE -3.34%) and other sports brands, Lululemon has expanded its direct-to-consumer (DTC) channels – including its e-commerce platform and physical stores – to reduce its reliance on third-party retailers. As a result, its booming digital sales more than offset the impact of its temporary store closures throughout the pandemic.

Lululemon’s annual revenue grew from $2.3 billion in fiscal year 2016 (ending January 2017) to $6.3 billion in 2021, representing a compound annual growth rate ( CAGR) over five years of 22.3%. By comparison, Nike’s revenue grew at a CAGR of just 6.3%, from $34.4 billion in fiscal 2017 (ended May 2017) to $46.7 billion in 2022.

Lululemon ended the second quarter of fiscal 2022 with 600 stores, compared to just 406 at the end of fiscal 2016. Its ability to increase its store count by nearly 50% during the pandemic, rising inflation and supply chain disruptions indicate he is still very confident. in its ability to attract physical buyers.

Lululemon’s gross margin has grown from 51.2% in 2016 to 57.7% in 2021, even as new competitors like Difference‘s Athleta has attempted to loosen its grip on the yoga apparel and sports leisure market. This gross margin expansion indicates that it still has a lot of pricing power. That’s why its adjusted earnings per share (EPS) grew at a five-year CAGR of 29.5%.

Clear plans for the future

Lululemon has also consistently set clear growth targets and achieved them ahead of schedule. In April 2019, he outlined his “Power of Three” plan which aimed to double his digital revenue, double his men’s revenue and quadruple his international revenue from his fiscal 2018 numbers over the following five years.

Lululemon has already hit its number and men’s goals ahead of schedule in fiscal 2021, even as the pandemic has disrupted its business, and it’s on track to quadruple its international revenue by the end of the year. fiscal year 2022.

Lululemon achieved these goals so quickly that it introduced a new five-year growth plan, called “Power of Three x2”, in April. Once again, he plans to double his digital and men’s revenue, as well as quadruple his international revenue, over the next five years from 2021. He believes these efforts will boost his annual revenue to $12.5 billion. dollars by 2026, which would nearly double its 2021 revenue and represent a five-year CAGR of 14.7%.

The main weaknesses of Lululemon

Lululemon’s growth rates look solid, but it’s not inflation-proof. It expects its gross margin to decline by around 100 to 130 basis points this year as it faces higher freight costs, a slight increase in markdowns and greater investment in its channels. DTC. Nike issued a similar warning about its gross margins in its latest quarterly report on September 30.

Analysts expect Lululemon’s revenue and adjusted EPS to both grow about 27% this year. But in 2023, they expect its revenue and adjusted EPS to grow 14% and 15%, respectively, as discretionary spending gradually cools in an inflationary (or possibly recessionary) environment.

Lululemon is currently trading at 28 times forward earnings, so it is still trading at a premium to Nike and Adidas, which trade at 22 and 14 times forward earnings, respectively. But Lululemon is also growing faster than these larger competitors, so it still seems reasonably priced.

Is it a good time to buy Lululemon?

Lululemon isn’t a bargain yet, but it’s one of the few apparel stocks I’d recommend buying right now. It has a lot of pricing power, it’s growing much faster than most of its industry peers, and it easily met its five-year growth targets ahead of schedule, even as the pandemic put other retailers on your knees. Its growth may gradually slow over the next five years, but I think it’s still a promising long-term investment.

James T. Quintero