Oh, how the mighty have fallen. Since hitting a record of $511.29 on the tip of 2023, share prices of Lululemon Athletica (NASDAQ: LULU) have cratered 44%. That’s despite the S&P 500 generating a formidable 18% total return in the middle of the identical period.
To be clear, this apparel stock has still been an infinite market outperformer so far decade (up 650%). Nevertheless, investors have grow to be pessimistic in regards to the state of the business.
What’s the proper plan of motion? Must you purchase the dip on this growth stock? Let’s assess each the bear and bull arguments for Lululemon and see if an answer presents itself.
The apparel industry makes it hard for Lululemon to sustain success
Lululemon is believed for selling high-quality athletic and lifestyle apparel at premium prices. This has positioned it well historically. Nevertheless the intensely competitive nature of the apparel industry is difficult to disregard. There aren’t any barriers to entry. Which implies that anyone with an idea and access to capital can start designing and selling clothing, which has grow to be even easier with the looks of the net.
Moreover, consumers have zero switching costs. They’re free to be as loyal or disloyal as they please, spending their money on whatever clothes or shoes they like at any given time.
Additionally it is price mentioning just how difficult it’s to hunt down sustained success on this industry. Consumer tastes appear to in any respect times be changing. I’m unsure anyone could’ve predicted the resurging popularity of looser clothing these days.
In Lululemon’s case, it faces stiff competition across the board, from industry heavyweights like Nike and Adidas to smaller rivals like Vuori and Alo Yoga. This just signifies that the business must stay on top of its game in relation to product innovation. Throughout the most recent fiscal quarter (Q1 2024 ended April 28), Lululemon’s sales rose 10% yr over yr. While a healthy gain in its own right, that represented a slowdown from previous quarters. Perhaps the market thinks that Lululemon’s days of dominance are over.
There are reasons to be bullish about Lululemon
I fully accept and understand the bear case outlined above. But I feel Lululemon still merits consideration as a portfolio addition immediately.
This company possesses a strong brand. Before now five years, Lululemon’s gross margin has averaged a wonderful 56.5%. This implies pricing power, or the willingness of consumers to pay up for what they should imagine is a differentiated product offering.
Lululemon will also be very profitable, which you’d not immediately assume when taking a take a look at the stock’s disappointing performance this yr. The business generated $1.6 billion in free money flow in fiscal 2023 on revenue of $9.6 billion, good for a incredible margin of 16.7%. This allows management to repeatedly repurchase shares.
Despite the recent sales slowdown, it’s hard to not get excited in regards to the company’s long-term prospects. Lululemon only generated 27% of its Q1 2024 revenue outside the U.S. and Canada. Consequently, international markets, particularly China, present an infinite opportunity.
The final word reason investors should consider buying the stock comes all the best way all the way down to valuation. Lululemon shares traded at a price-to-earnings (P/E) multiple of 97 within the autumn of 2020 in the middle of the pandemic-influenced stock market boom. A sound argument may need been made that the stock wasn’t investable at that lofty level.
Nevertheless, the valuation is far more attractive today. Shares trade at a P/E ratio of 23.1. For comparison’s sake, the S&P 500 sports a P/E multiple of 24.4.
Lululemon’s slight discount to the overall market might not be warranted. In line with Wall Street consensus analyst estimates, the business is predicted to grow revenue and earnings per share at compound annual rates of 10.9% and 11.7%, respectively, between fiscal 2023 and monetary 2026. This favorable outlook is yet yet another reason to buy Lululemon stock.
Must you invest $1,000 in Lululemon Athletica immediately?
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Neil Patel and his clients don’t have any position in any of the stocks mentioned. The Motley Idiot has positions in and recommends Lululemon Athletica and Nike. The Motley Idiot recommends the subsequent options: long January 2025 $47.50 calls on Nike. The Motley Idiot has a disclosure policy.
Down 44%, Should You Buy the Dip in This Growth Stock? was originally published by The Motley Idiot