If you seek growth at a reasonable price for your portfolio, you might want to take another look at Lululemon Athletica's (LULU -1.09%) stock. Sure, the apparel specialist is in a retailer, a sector currently under pressure as consumers slow their spending after several years of high demand. But there's no sign of such a slowdown hurting Lululemon's business, at least through mid-2022. And, if management has its way, the business will be far bigger in a few years.
Let's take a closer look at the long-term investing thesis for Lululemon stock, which has become much cheaper since the start of 2022.
Excellent sales trends
The retail chain's early-September earnings update showed no signs of a change in the market-thumping demand trends that investors have come to expect from the business. Same-store sales jumped 29% through late July, with growth balanced between its U.S. market and international geographies.
Lululemon had no trouble convincing both new and existing customers to try out its new releases, whether they were in its core women's demographic, or in newer lines like menswear, outdoor, or sneakers. Customer traffic was up 30% year over year in Q2, on top of the 150% surge a year ago.
That boost reflected an acceleration of growth, management noted in a conference call with analysts, compared to the prior quarter. Other peers in the space, meanwhile, have seen slowing growth. "The momentum in our business remained strong," CEO Calvin McDonald said.
Not sacrificing profits
Lululemon didn't need to support that growth with price cuts, either. Merchandise profit margin landed higher than management predicted, in fact, and only fell by 1.6 percentage points -- mainly because of higher supply chain costs.
Adjusted operating profit margin increased, even as peer retailers posted declines. Lululemon generated $391 million of operating profit for a 20.9% margin, compared to 20.6% a year ago.
LULU Operating Margin (TTM) data by YCharts
These wins made Lululemon an even brighter standout in the retailing space, with cash flow staying solidly positive despite extra spending on inventory, store expansions, and wages over the past year.
Lululemon has a bumpy short-term outlook
Management says they don't see any evidence yet of a spending pullback one would see if a recession were already at hand in the athleisure niche. That slump might be on the way, though, meaning extra risks in areas like inventory, which is up 85% year over year. Still, that inventory holding is only up 38% compared to the same period in 2019, which isn't a lot, considering how much higher its sales footprint is today.
Speaking of that footprint, management now forecasts revenue approaching $8 billion in 2022, which would translate into a 26% compound annual growth rate over the last three years. Yet the stock price is down about 20% so far this year.
That price slump seems to reflect a market sentiment that Lululemon will have a tough holiday season that slows its growth and reduces profitability. However, even if that bearish scenario plays out, the business's long-term outlook is bright as it expands deeper into new geographies and additional product categories.
Lululemon will likely win market share even during any demand pullback, which is the best that shareholders can hope for in any business. That prospect, plus the chance of steady or accelerating growth ahead, should excite investors about owning this growth stock.
