1 Growth Stock Down 50% to Buy Right Now
Lululemon's (NASDAQ: LULU) stock hit a record high of $511.29 on Dec. 29, 2023. That marked a whopping 5,581% gain from its split-adjusted IPO price of $9 per share in 2007, and would have turned a $20,000 investment into $1.14 million.
At the time, the bulls were dazzled by the athleisure brand's rapid growth. But since it hit its all-time high, Lululemon's stock has declined nearly 50% to about $260 today. It lost its luster as its growth cooled off and rising rates compressed its valuations. That was a steep pullback, but I believe it's still a good buying opportunity for long-term investors.
Image source: Getty Images.
Why did Lululemon's stock initially soar?
Lululemon initially carved out a niche by selling high-end yoga apparel for women. It subsequently expanded its business by selling more types of athleisure apparel, men's active apparel, and athletic shoes.
Lululemon reinforced its brand appeal by limiting its markdowns, offering free yoga classes, and sponsoring community events. It also grew its direct-to-consumer business by expanding its e-commerce capabilities and opening more brick-and-mortar stores. That strategy widened its moat, tightened its supply chain, protected its gross margins, and reduced its long-term dependence on wholesale retailers.
From fiscal 2013 to fiscal 2023 (which ended in January 2024), Lululemon increased its store count from 254 locations to 711 locations. Its total revenue and earnings per share (EPS) both increased at a compound annual growth rate (CAGR) of 20%. Over the past 10 years, its stock rallied nearly 570%, and it repurchased 13% of its shares.
Why did Lululemon's stock stumble?
A lot of that growth was driven by its two consecutive "Power of Three" plans. Both of those plans called for Lululemon to double its digital revenues, double its men's revenues, and quadruple its international revenues over a five-year period.
It launched its first Power of Three plan in 2019, and it achieved its three goals ahead of schedule even as the pandemic temporarily disrupted its brick-and-mortar sales in 2020. That's why it kicked off a second Power of Three plan in 2022. But in fiscal 2023, Lululemon's top-line growth decelerated significantly from its previous two years.
Metric | FY 2021 | FY 2022 | FY 2023 |
|---|---|---|---|
Revenue Growth | 42% | 30% | 19% |
Comparable Sales Growth | N/A* | 25% | 13% |
Store Count | 574 | 655 | 711 |
Adjusted Gross Margin | 57.7% | 56.2% | 58.6% |
Adjusted Operating Margin | 22% | 22.1% | 23.2% |
Adjusted EPS Growth | 66% | 29% | 27% |
Data source: Lululemon. *Not reported due to COVID-19 closures in fiscal 2020.
It blamed that slowdown on its sluggish U.S. sales, which offset its stronger overseas growth. Those challenges overshadowed its expanding gross and operating margins, which both improved as inflation eased and it trimmed its expenses.
For fiscal 2024, Lululemon expects its revenue to rise 11% to 12% (or 10% to 11% after excluding an extra week this year) as its reported EPS grows 17% to 19%. That deceleration is disappointing, but CEO Calvin McDonald said the company still continued to "execute well" on its Power of Three goals during its latest conference call in June.
Why is Lululemon's stock worth buying right now?
Lululemon's stock was also hit by Nike's (NYSE: NKE) messy earnings report in late June and the abrupt discontinuation of the Breezethrough leggings, which had been broadly mocked for their unusual "whale tail" fit, in July.
But at $260, Lululemon only trades at 18 times the midpoint of its EPS guidance for fiscal 2024. That makes it historically cheap and a bargain compared to Nike, which still trades at 26 times forward earnings. From fiscal 2023 to fiscal 2026, analysts still expect Lululemon's revenue to grow at a CAGR of 10% as its EPS increases at a CAGR of 13% -- so its business won't head off a cliff anytime soon.
Lululemon's insiders have also bought more shares than they sold over the past three months, and the company boosted its buyback authorization to $1.7 billion earlier this year. That warm sentiment suggests it's a good time to buy Lululemon's shares if you believe its business will eventually bounce back and stabilize as the macro environment improves.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica and Nike. The Motley Fool recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.
