Lululemon Athletica (LULU -0.03%) has been one of the highest-growth athletic apparel retailers in recent history. It easily weathered the pandemic, and it continued to open new brick-and-mortar stores as other apparel retailers shuttered their struggling stores to cut costs. It's also still on track to generate double-digit sales growth for the foreseeable future.

Yet, Lululemon's stock has still declined more than 20% this year as inflation, rising interest rates, and other macro headwinds drove the major indexes into a grueling bear market. But does Lululemon's pullback represent a good opportunity to buy some shares of its high-flying stock -- which has still rallied more than 400% over the past five years?

A group of people attend a yoga class.

Image source: Getty Images.

Lululemon's core strengths

Lululemon initially carved out a defensible niche in the crowded athletic apparel market by selling high-end yoga apparel for women. It also locked in some of those customers with free yoga classes and other activities. Lululemon subsequently expanded its reach with other types of athleisure apparel, men's apparel, and even shoes. It also acquired Mirror, a maker of connected fitness mirrors for remote workouts, in 2020.

Just like Nike (NKE -0.13%) and other athletic brands, Lululemon expanded its direct-to-consumer (DTC) channels -- including its e-commerce platform and brick-and-mortar stores -- to reduce its dependence on third-party retailers. As a result, its soaring digital sales largely offset the impact of its temporary store closures throughout the pandemic.

Lululemon's annual revenue rose from $2.3 billion in fiscal 2016 (ended January 2017) to $6.3 billion in 2021, representing a five-year compound annual growth rate (CAGR) of 22.3%. By comparison, Nike's revenue rose at a CAGR of just 6.3% from $34.4 billion in fiscal 2017 (ended May 2017) to $46.7 billion in 2022.

Lululemon ended the second quarter of fiscal 2022 with 600 stores, compared to just 406 at the end of fiscal 2016. Its ability to increase its store count by nearly 50% through the pandemic, rising inflation, and supply chain disruptions indicates it's still very confident in its ability to attract brick-and-mortar shoppers.

Lululemon's gross margin increased from 51.2% in 2016 to 57.7% in 2021, even as newer competitors like Gap's Athleta tried to loosen its grip on the yoga apparel and athleisure market. That gross margin expansion indicates it still has plenty of pricing power. That's why its adjusted earnings per share (EPS) rose at five-year CAGR of 29.5%.

Clear plans for the future

Lululemon has also consistently laid out clear growth targets and achieved them ahead of schedule. Back in April 2019, it introduced its "Power of Three" plan which aimed to double its digital revenue, double its men's revenue, and quadruple its international revenue from its fiscal 2018 numbers within the following five years.

Lululemon already cleared its digital and men's targets ahead of schedule in fiscal 2021, even as the pandemic disrupted its business, and it's on track to quadruple its international revenue by the end of fiscal 2022.

Lululemon hit those targets so quickly that it introduced a new five-year growth plan, called "Power of Three x2," this April. Once again, it plans to double its digital and men's revenue, as well as quadruple its international revenue, within the next five years relative to 2021. It believes those efforts will boost its annual revenue to $12.5 billion by 2026 -- which would be nearly double its 2021 revenue and represent a five-year CAGR of 14.7%.

Lululemon's main weaknesses

Lululemon's growth rates seem solid, but it isn't immune to inflation. It expects its gross margin to decline about 100 to 130 basis points this year as it deals with higher freight costs, a slight uptick in markdowns, and higher investments in its DTC channels. Nike issued a similar warning regarding its gross margins during its latest quarterly report on Sept. 30.

Analysts expect Lululemon's revenue and adjusted EPS to both increase about 27% this year. But in 2023, they expect its revenue and adjusted EPS to grow 14% and 15%, respectively, as discretionary spending gradually cools off in an inflationary (or possibly recessionary) environment.

Lululemon currently trades at 28 times forward earnings, so it's still trading at a premium to Nike and Adidas, which trade at 22 and 14 times forward earnings, respectively. But Lululemon is also growing faster than those larger competitors, so it still seems reasonably valued.

Is it the right time to buy Lululemon?

Lululemon isn't a screaming bargain yet, but it's one of the few apparel stocks I'd recommend buying right now. It has plenty of pricing power, it's growing much faster than most of its industry peers, and it easily achieved its previous five-year growth targets ahead of schedule even as the pandemic brought other retailers to their knees. Its growth could gradually cool off over the next five years, but I believe it's still a promising long-term investment.