Nike is the unrivaled king of athletic wear. It is the dominant name in athletic footwear, by far, and it has created such a strong brand that even though it's an activewear brand, it is the top-selling clothing brand in the U.S., also by a wide margin.
There are plenty of reasons to hold on to Nike stock. But there are smaller brands that are growing much faster, and many billionaire investors are out for growth. They're often fund managers who are paid by high-net-worth individuals to get results, and these days, they're buying Nike rival Lululemon Athletica (LULU -1.38%).
Catching the athleisure wave
Billionaire investors were scooping up shares of Lululemon in 2024's first quarter. Israel Englander of Millenium Management added 64,488 shares, increasing his position by 346%, Ken Griffin of Citadel Advisors added 209,776 shares, increasing his position by 116%, and Jeff Yass of Susquehanna purchased 144,704 shares, increasing his position by 111%.
Why Lululemon? It has solidified its place as the top premium activewear brand, gaining customers and loyalty. They love its patented fabrics, casual styles, and commitment to creating high-quality and well-designed products that fit their lifestyle. Some of that is its positioning and branding, where it shines, and some of that is an excellent product. Together, they make Lululemon a powerhouse company that continues to gain fans and consistently generate high sales growth.
This was illustrated again in the 2024 fiscal first quarter (ended April 28). Sales increased 10% year over year in the quarter, driven by a 6% increase in comparable sales. Gross margin increased by 0.2 points to 57.7%, and earnings per share (EPS) rose from $2.28 last year to $2.54 this year, beating Wall Street's estimates of $2.38.
Some inflation showed up in Lululemon's operating margin, which declined by 0.5 percentage points. Even at this level, it's industry leading, by far. Compare it to Nike, Adidas, and Skechers.
LULU Operating Margin (Quarterly) data by YCharts
Lululemon charges high prices for its premium products, and loyal customers pay up. That gives it resilience when there's inflation.
The story keeps going
Lululemon is powering through its "power of three x2" strategy, which is to double men's and e-commerce sales and quadruple international sales, aiming for a doubling of net revenue from 2021 levels by 2026. Its growth drivers are "product innovation, guest experience, and market expansion."
International is a key part of the story right now, accounting for all of its comparable growth in the first quarter. International sales accounted for 21% of the total in 2023, and CEO Calvin McDonald says that market is still underpenetrated. He sees it moving up to 50% over the next few years, creating significant growth opportunities.
While Lululemon's business is performing according to its objectives, the flat U.S. comparable sales could be worrisome. McDonald said that there were major inventory issues in the quarter leading to missed sales, but that they've been corrected. Some of these include out-of-stock sizes and a narrow assortment of colors. The good news is, demand is strong. However, investors should keep an eye on this to see if it develops into a pattern.
Management stuck to its full-year guidance of an 11% or 12% increase in revenue over 2023. It updated its guidance for full-year EPS of $14.37, up from previous guidance of $14.10 and up from $12.77 in 2023 EPS. Wall Street is expecting $14.33 in full-year EPS.
Lululemon stock looks like a bargain
Many investors have turned pessimistic about Lululemon. Growth is slowing, and it's facing fierce competition from new companies like Alo Yoga and Vuori, not to mention the regular competition from Nike and similar companies. In the pressured inflationary environment, it's also likely that some of its customers are switching down.
Given these pressures, Lululemon's performance actually looks pretty impressive. But Lululemon stock is down nearly 40% in 2024, which seems overly harsh. At the current price, it trades at a forward one-year price-to-earnings ratio of less than 20, which makes Lululemon stock appear to be a bargain.
Lululemon is demonstrating strong growth despite a grim operating environment, and it should accelerate under better conditions. It has established itself as a leader in its industry and should be able to continue that for many years. Retail investors looking for a safe growth stock should consider following the billionaire investors into a position in Lululemon.
