Over the past 12 months, Lululemon (LULU -1.72%) has meaningfully underperformed the S&P 500, rising just 11%. But if we zoom out, we see a completely different picture. Over the past three-, five-, and 10-year time periods, the burgeoning athletic apparel maker absolutely crushed the broader market. 

Lululemon is a business that's firing on all cylinders today. Read on to find out if the stock is worthy of your investment dollars. 

Person working out on a mat at home.

Image source: Getty Images.

The brand is everything 

A primary determinant of whether or not a clothing company succeeds is its consumer brand relevance. Lululemon excels in this area, as its premium-priced products generated a gross margin of 58.1% in the most recent quarter. This is outstanding by any measure, and it underscores how popular Lululemon is becoming. 

Piper Sandler's fall 2021 Taking Stock With Teens survey revealed that Lululemon was the fifth-most popular clothing brand among this lucrative demographic. Nike (NYSE: NKE) was the leader in this category by a wide margin, but it's worth pointing out that the Oregon-based business has its own dedicated Kids segment. Lululemon was founded 34 years after Nike and doesn't even target the younger demographic, so to see it make this list is pretty remarkable. And Lululemon's quarterly sales of $1.5 billion are far less than Nike's first-quarter 2022 apparel sales of $3.5 billion, leaving a lot of room for Lululemon to rise up the rankings. 

Supporting Lululemon's strong brand is a focused direct-to-consumer distribution strategy that does away with relying on third-party retailers to push merchandise. In the most recent quarter, digital sales represented 41.2% of overall business, down from 61.4% in the second quarter of 2020 when many stores were temporarily closed. And while supply chain disruptions are having ripple effects across the global economy, Lululemon's premium status affords the company the ability to invest in more air freight ahead of the important holiday shopping season while still expanding its gross margin. 

Key growth drivers 

In addition to selling to women, the company has been thriving by advancing its men's business. Over the past two-year period, the men's segment registered annualized revenue growth of 31%, exceeding the women's category by five percentage points. Thanks to a heightened interest in more comfortable clothing with the popularity of remote work, among the men's best-sellers are items like T-shirts, hoodies, pants, and joggers. 

"This year, we will likely achieve the goal we set to double our men's business, and we remain on track to quadruple our international business by 2023, if not sooner," CEO Calvin McDonald highlighted on the Q2 earnings call. He expects international sales to one day match North America's, an ambitious goal given that just 14% of revenue came from overseas in 2020. 

Of the 45 to 55 net new stores Lululemon plans to open in 2021, 35 to 40 will be in international markets. Nike, which generated 60% of its Q1 2021 revenue outside of North America, provides a relevant comparison as to the sizable opportunity Lululemon is presented with. 

Don't worry about the valuation 

Lululemon's stock currently trades at a forward price-to-earnings ratio of 51. But just like its in-demand apparel, this is a premium stock worth paying up for. Wall Street is very bullish on the stock, recommending it as a strong buy with 12-month upside of 22% from Tuesday's closing price. Consensus forecasts also call for earnings to grow at an annualized rate of 34% from fiscal 2020 through fiscal 2023. 

This is a business that was booming before the pandemic. And with its focus on high-quality athleisure clothing, it will continue to do well in a post-pandemic world. Lululemon is a stock that has the potential to make you rich over the next decade.