Down 30% this year, is it time to buy Lululemon stock?

Retail/apparel investors are currently concerned about supply chain shocks, inflation and rising transportation costs impacting the health of businesses.

Although this has hurt some businesses, Lululemon Athletica (LULU) defied all predictions and continues to post excellent financial results. The fast-growing athleisure brand is increasing market share among high-income female consumers and performing well with expansions into footwear and other product categories.

However, given recent market volatility, the stock is down 29% year-to-date. With the company growing as fast as ever, is now the time to acquire Lululemon stock?

Image source: Getty Images.

Good results in the first quarter

Lululemon released its first quarter 2022 financial results on June 2. Overall revenue rose 32% year-over-year to $1.6 billion, with same-store sales up an impressive 24%, showing a strong recovery in in-person shopping since the COVID-19 pandemic.

One of Lululemon’s competitive advantages over smaller clothing brands is its large store base in major cities around the world. It opened five new stores in the first quarter and now has 579 stores worldwide.

Operating profit totaled $260 million in the quarter, up 34% year-over-year, with operating margins up slightly from 2021. Investors should be satisfied that profit margins are holding up despite rising inflation and shipping costs, which generally have a negative impact on profitability for retailers.

Management uses those profits to return cash to shareholders with share buybacks, at a total cost of $232.6 million during the quarter. Share buybacks reduce a company’s stock count and help increase free cash flow per share, the primary driver of long-term shareholder return.

For the full year, Lululemon expects revenue of between $7.61 billion and $7.71 billion. If it hits the upper end of this range, it would equate to a three-year compound annual growth rate (CAGR) of 25%. Pandemic or not, athleisure is here to stay, and Lululemon is taking full advantage of the trend.

Growth Opportunities in Footwear and Other Categories

Lululemon’s bread and butter is the women’s leggings and yoga category. But it has recently expanded into new product categories, including men’s workout gear, which has driven growth in recent years. Over the next five years, he plans to further expand his athleisure portfolio.

First, and perhaps most importantly, it recently launched a women’s running shoe called Blissfeel. This is just the beginning, but management said that so far demand for the product has far exceeded its initial sales forecast. The athletic shoe market is valued at over $100 billion in annual sales due to the high prices consumers are willing to pay. It will be difficult to win market share from leaders like Nike and Adidasbut even if Lululemon can gain share of the athletic shoe market, it can generate high levels of revenue growth.

Second, Lululemon is expanding beyond general yoga/workout wear into new niches like golf, tennis, and hiking. Again, as with shoes, it’s unclear how much of Lululemon’s business will come from these niches in a few years, but they may allow the brand to expand to more consumers around the world.

Third, Lululemon still has plenty of room to grow its brand awareness in multiple international markets. The most important of these are China and Europe, where the company has less than 10% unaided awareness. As the team increases marketing and opens more stores in these regions, this metric should change in a more positive direction.

An ambitious 5-year growth plan

At its recent analyst event, Lululemon management outlined its five-year growth plan. The company is expected to double its revenue by 2026, which will be achieved by doubling the men’s and e-commerce segments and quadrupling international revenue.

Investors will need to watch these categories closely over the next few years. If Lululemon hits its target, it could generate $12.5 billion in revenue in 2026. Assuming operating margins remain stable at around 22%, that will equate to $2.75 billion in annual operating profit. in 2026.

So is the action a buy?

With the recent pullout, Lululemon now has a market capitalization of $35.5 billion. Assuming it hits $2.75 billion in operating earnings in 2026, the stock trades at a forward price-to-operating earnings ratio of 13, well below the market average. This indicates that investors are heavily downplaying Lululemon’s ability to overcome these financial hurdles.

Apparel is a tough industry, with only a few companies like Nike able to maintain their dominance. But with Lululemon’s strong brand, growing store count, and expanding into new product categories, the company looks set to join that exclusive club. At a reasonable valuation, that makes the stock a buy right now.

James T. Quintero