It isn't too hard to find bargains in today's market, when many top stocks are declining in the volatile macroenvironment. But it can be confusing to weed out the good ones from the value traps -- that is, stocks which look cheap but don't actually offer high growth potential.
Focusing on the fundamentals can help steer you away from the tempting cheap grabs toward the solid stocks with the most opportunity. Companies demonstrating high growth despite obstacles and a proven model of success are your best bets. When prices are low due to the general investing environment, you can land a great deal.
One example now is Lululemon Athletica (LULU 1.74%). The stock is down this year, and investors should consider buying this powerhouse stock on the dip.
Image source: Getty Images.
What retail slowdown?
Lululemon reported first-quarter earnings on Thursday that beat its internal guidance as well as Wall Street's expectations. Sales of $1.6 billion, a first-quarter record, increased 32% over last year, and earnings per share were $1.48 vs. $1.11 last year.
After the market didn't respond well to Target's and Walmart's disappointing results a few weeks ago, investors have been anxious about the retail environment in general. But there have been some standout reports since then, and it's clear that while retail as a whole has been affected by inflation and other macroeconomic considerations, not all retailers have been affected the same way or to the same degree.
Among the challenges Lululemon faced during the quarter were closed stores in China and too much inventory. The China situation wasn't devastating since it accounts for around 4% to 6% of the total unit volume, and the inventory issue is manageable because much of the company's product line is basics. That means it doesn't have to discount inventory at the end of the season to clear it out for new styles.
The company is doing an excellent job of balancing demand with increased costs due to supply-chain issues and inflation, and some price increases were helpful. The company's premium branding and product execution give it some leverage to raise prices without seeing a sales decline. However, these issues didn't go unnoticed, and although profits increased over last year, margins contracted slightly.
New goals, new products
Management released a new strategy in April that it calls, "Power of Three x2." That's because it's another round of the same strategy it put in place previously and is already ahead of schedule. Lululemon has lots of plans to keep up the momentum. In March, it rolled out its Blissfeel shoe, an activewear model designed for women. CEO Calvin McDonald said, "The response has been enthusiastic. And since we were prudent with our inventory buys, we have seen out of stocks."
This could be a game-changer for the company and significantly affect sales. Its careful planning and design process means that instead of over-producing and seeing very high sales in the short term, it's taking a slower approach for long-term success.
Lululemon launched a host of other new products in the first quarter as well, all based on feedback from customers and "ambassadors" (such as professional athletes and trainers). These include the SenseKnit fabric, supporting its running products; the Hike collection, which aims to fill the needs of the hiking community; and Throwbacks, which are new editions of previously successful limited releases.
A great stock at a low price
Lululemon stock is down 23% year to date, and shares are trading at a relatively cheap 38 times trailing 12-month earnings. The company's upscale and loyal market provides some resilience under the current challenging circumstances, and its innovation pipeline gives it a long runway toward future growth. Investors should expect long-term gains, and the low price makes now a good time to buy shares.
