What happened
Shares of athleisure style setter Lululemon Athletica (LULU 0.28%) dropped 18% in May according to data provided by S&P Global Market Intelligence. Investor fears based on the poor performance of many retailers in the first quarter drove many retail stocks to fall, and it seems Lululemon wasn't spared.
So what
Lululemon has become a force in activewear due to its on-trend styles, ability to understand and connect with its customers, and proper management. It can command high prices, and it provides the quality and customer care that generate customer satisfaction, loyalty, and strong full-price sales. This eased its pandemic declines and helped it bounce back faster than other apparel retail companies.
Image source: Getty Images.
Sales have been growing dramatically since. In fiscal 2021 (ended Jan. 30), revenue increased 42% to a record $6.3 billion. Direct-to-consumer sales, which comprises digital sales, represented 44% of the total. Operating margin increased 2.7% to 21.3%, and earnings per share increased to $7.49 from $4.50 last year.
Lululemon releases fiscal 2022 first-quarter earnings late today. Management is guiding for 24% to 26% sales growth and 20% to 22% growth for the full fiscal year.
After meeting its "Power of Three" goals ahead of schedule, management recently announced the "Power of Three x2" growth strategy, a new plan to double revenue by 2026. It plans to focus on product innovation, guest experience, and market expansion, and to generate sales growth by doubling men's and digital sales and quadrupling international sales relative to the 2021 numbers.
Now what
Lululemon stock has been a multibagger over the past several years, strongly outperforming the market. 
Investors may be wondering if that run is over, or if it makes sense to buy shares when the retail environment is not hospitable. Walmart and Target both recently posted disappointing first-quarter earnings reports, sending ominous signals about consumer spending in this inflationary environment and sending the market down. But not all retailers told the same story. Home Depot and Costco both posted solid results. As a premium product, Lululemon clothing could potentially be first on the chopping block when the going gets tough. At the same time, shoppers who can afford Lululemon products are less likely to be affected by the macroeconomic environment.
At the current price, Lululemon stock trades at a price-to-earnings ratio of 39, which is attractive for a stock with its growth potential.
