Lululemon Athletica (LULU 1.43%) soundly beat analysts' expectations when it released fiscal 2022 second-quarter results (for the quarter ending July 31) on Sept. 1. The stock has climbed 10% since the earnings release, which brings its year-to-date performance to a loss of 16.7% -- slightly ahead of the S&P 500.
Investors are not short of cheap stocks in this market sell-off, and Lululemon stock is no bargain. Its price-to-earnings ratio looks expensive, but given Lululemon's business performance compared to world-class retailers, it might be worth the premium.
Lululemon is outperforming the field
At a forward price-to-earnings (P/E) ratio of 33 based on this year's analyst earnings estimates, Lululemon is not one of the better values. If you're looking for value in retail, Home Depot and Target might fit the bill. These retail leaders trade for much lower P/E multiples and offer dividend yields above 2%.
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Of course, large retail companies don't offer the growth potential of a top athleisure brand like Lululemon.
Indeed, Lululemon as a company has performed beautifully in 2022. Lululemon's competitors, Nike and Under Armour, have struggled to maintain revenue growth above 10% this year. But Lululemon is in full stride, with revenue growth holding around 20% or better. Not even Amazon has accomplished that feat.
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The market is underestimating Lululemon right now. All of the company's key growth drivers look fantastic. International revenue is up 40% on a three-year annualized basis. That's a slight acceleration over the previous quarter's 37% rate of growth over the same period.
What's more, the men's business segment continues to grow faster than women's, up 30% on a three-year annualized basis compared to women's growth of 25%. Men's revenue makes up less than a quarter of Lululemon's entire business, but if the brand is going to scale into a global powerhouse, the men's business needs to demonstrate similar potential as the women's side. Investors can check that box.
Lululemon is on schedule with its new five-year objective to double 2021 revenue by 2026. It only needs to maintain a 15% compound annual growth rate to achieve that goal, and it's growing well above those rates so far.
Indeed, Lululemon is growing faster than it was before the pandemic. Its three-year annualized revenue growth is currently 26% -- higher than the 19% leading up to 2020.
Lululemon is as good as it gets in retail
While higher product costs caused a small drop in gross margin last quarter, sound cost management further down the income statement pushed adjusted earnings per share up 33% year over year. That fully supports the stock's premium valuation.
You'll be hard-pressed to find another retail business with Lululemon's brand loyalty, high margins, and growth profile. I believe Lululemon is one of the best retail stocks to own for the long term. Its forward P/E of 33 is not cheap, but it's a fair price to pay for a fast-growing brand with a long runway of growth.
