Shares of Lululemon Athletica (LULU 4.43%) are underwater for the year, but a better-than-expected earnings report sent the stock surging. The stock is currently down 4.8% year to date, outperforming the Nasdaq Composite that is down 8.2%.
Despite near-term economic uncertainty, Lululemon remains on offense. Here are three highlights from the quarter that should encourage investors to buy and hold this top retail stock.
Peter Lynch would love Lululemon
On a two-year compounded basis, Lululemon's fiscal fourth-quarter revenue increased 23%. Total revenue for the full year crossed $6 billion for the first time. But note that Q4's rate of growth is higher than Lululemon's performance in fiscal 2015 when revenue grew 15% to reach $2.1 billion for the year.
The consistency of Lululemon's growth would have appealed to famed investor Peter Lynch, who looked for promising growth stories in retail that continued to get better as a company executed its growth strategy. Lululemon's story is certainly getting more interesting after launching its new footwear line recently.
Untapped growth opportunities
Lululemon introduced its new women's footwear line called Blissfeel in early March. While it's still early, management reported that the guest response has exceeded their expectations.
By going after the women's market first, with a men's shoe scheduled to launch in 2023, Lululemon believes it has an opportunity to make a big splash in this competitive market.
"We intentionally started with women first because we saw an opportunity to solve for the fact that, more often than not, performance shoes are designed for men and then adapted for women," Chief Product Officer Sun Choe explained in a press release announcing the new shoe line.
Lululemon plans to launch additional women's styles this year and use the same approach with men next year.
Small brand in a large and growing industry
Lululemon has been a tremendous success story since its founding with a single selling space in a yoga studio in Vancouver more than 20 years ago. It continues to gradually expand its store footprint, opening 22 new stores last quarter across Asia Pacific, North America, and Europe, bringing the total to 574 worldwide. It also has a strong online presence that generated 49% of total revenue last quarter.
Overall, Lululemon is a tiny $6 billion brand operating in an athletic wear industry that generates nearly $200 billion in annual revenue. As CEO Calvin McDonald explained on the earnings call, Lululemon is benefiting from "category strength as athletic apparel continues to outpace growth in overall apparel."
Lululemon is a relatively low-risk investment with big return potential. It has proven itself for 20 years with steady growth, and most importantly, the brand is showing universal appeal as it expands everywhere from China to Europe. Investors who buy and hold this retail stock should beat the market's average return soundly over the next 20 years.