The market is swinging between highs and lows as geopolitical turmoil and macroeconomic trends continue to play out on the world stage. Should you be buying growth stocks at all as they fall in droves?
Yes, if they have strong business fundamentals that inspire confidence for the long term, and if you have funds that you don't need right now after debts are paid off to take advantage of dropping prices. Sagging stocks give investors the opportunity to find great companies at attractive prices, so while it might look scary out there, even times like this can be used purposefully.
One stock that's been demonstrating high growth and is now on sale is Lululemon Athletica (LULU -0.03%), and at its lowest price since the 2020 market crash, now is a great time to buy shares.
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Making waves in athleisure
Lululemon has made a stunning rise as a leader in athletic wear over the past few years, carving out a niche for its stylish workout wear and challenging leader Nike. It has demonstrated that it's not a passing fad and has taken a real hold as a force in casual attire, even dictating styles. It has successfully moved into new categories as well, and its popularity continues to spiral upwards.
Sales have bounced back and surpassed pre-pandemic levels, increasing 23% year over year in the 2021 fourth quarter (ended Jan. 30) to $2.1 billion. Full-year 2021 revenue reached a record $6.3 billion.
A combination of factors have led to the company's success. One is its ability to read and respond to its shoppers. It offers fitness enthusiasts a community feel with classes and products that speak to them. It also provides omnichannel shopping options that fit into the millennial lifestyle, and direct-to-consumer sales, which comprise its digital program, typically account for about half of the total. It upped its game when the pandemic started to reflect new realities, adding services to the digital program such as appointment setup and drive-up shopping when physical store shopping was limited.
It also continues to innovate with its product fabric and design, and exclusive, patented fabrics allow it to maintain an upscale brand and achieve a high full-price sales rate. At the same time, its product line is highly unseasonal; core, seasonless products make up 45% of the total, which means it has less pressure to mark down prices. This leads to better margins and higher profits. Earnings per share increased from $4.50 to $7.49 in 2021.
These have all helped Lululemon hit its original "power of three" program target goals early, and it's now set new goals to "double men's, double digital, and quadruple international revenues by 2026." That's on top of its core women's category and other collections, such as footwear and accessories, and management expects to double revenue in five years to $12.5 billion.
Anything to worry about?
I am confident in Lululemon's ability to change with trends and adapt, keeping its place in activewear. However, it's definitely a good idea to consider any potential pitfalls here. One would be shifting trends. The company is certainly benefiting from the work-from-home trend that's making casual wear more popular. Although things are still moving in that direction, Lululemon would have to pivot to keep growth strong if, at some point, that changes.
It's also investing in new approaches that may not pay off. For example, its acquisition of Mirror, a connected fitness product, hasn't yet panned out in the way management expected, and it's revised its goals for Mirror. People are out again, and home fitness products such as Peloton's equipment have seen dropping sales. It's launching a highly anticipated footwear line that's likely to do better. In general, a proactive approach is a positive quality for a growth company, as long as investments are well thought out.
Grab this opportunity
Lululemon stock is down 23% this year, even as it demonstrates impressive growth. That seems to be tied to the general market sell-off. At this price, shares trade at a price-to-earnings ratio of 39, a reasonable valuation for a great growth stock.
Lululemon appears to have strong future opportunities and the tools and management to achieve them, and it's a great pick while stock prices are down.
