There's a palpable fear of missing out among investors when markets are soaring as they have been in the past year. It's hard not to feel regret, after all, if you don't own top-performing stocks that are doubling or tripling the wider market's return.
Of course, it isn't possible to know ahead of time which stocks will jump higher in the short term. Investors may get some clues to that performance potential, though, usually in the form of market share growth and unusually high profit margins.
There's a business that's achieving those financial wins today but has been discounted on fears about a growth slowdown ahead. That combination of impressive finances and a compelling valuation could lay the groundwork for excellent returns ahead. You might look back in a few years and regret not having picked up this highly profitable retailer. Let's look at some reasons why Lululemon Athletica (LULU 3.00%) is worth revisiting as a stock buy.
The challenges
Lululemon's late-March quarterly update contained some troubling news about the business that formed the basis for its subpar stock performance lately. Q1 sales growth slowed to 9% in the core U.S. market from 12% in the previous quarter.
That was a better result compared to peers such as Nike (NKE 1.71%), which announced flat sales in its fiscal Q3. But Lululemon stock was priced for faster growth, and it was jarring for investors to see management forecast single-digit sales growth in the current quarter, down from 30% gains early last year.
Shareholders are understandably worried that there's more room for the stock to fall from here, since Lululemon is priced at a premium of 5 times annual sales compared to Nike's valuation of below 3 times sales.
Looking further out
The retailer is much closer to the beginning of its growth journey than to the end of it. Start with international sales, which expanded at a 56% rate last quarter. That figure shows how Lululemon's brand is resonating outside its most mature markets of Canada and the U.S. Yet international sales account for only 20% of the business today, compared to over 60% for Nike. That's a long growth runway.
Meanwhile, Lululemon is making smart, deliberate moves into new product categories and demographics. Recent hits include outerwear and footwear. The chain is also building beyond its core female demographic into kids' and men's apparel. Those moves will help the chain expand on its roughly $10 billion of annual revenue and toward Nike's $50 billion level.
Price and finances
Lululemon reported some eye-popping financial results for the 2023 fiscal year. Revenue soared 20%, gross profit margin jumped 3 percentage points to 58% of sales, and adjusted operating profit margin improved to 23% of sales from 22% of sales a year earlier. Each of those metrics made it an industry leader and reflected valuable competitive advantages like customer loyalty and pricing power.
Indeed, the next fiscal year will be a disappointment compared to those impressive figures. It's much harder to lift profitability when sales growth is closer to 10% than 20%. Investors shouldn't let that temporary slump keep them away from this stock, though.
Lululemon shares might stay volatile as Wall Street tries to predict the exact timing of its growth rebound. Patient shareholders can look past that prospect and focus instead on picking up shares of this strong retailer at a discount.
