Investor attitudes around growth stocks have changed dramatically since Lululemon Athletica (LULU 1.31%) shares hit their all-time high in late 2021. The stock traded at over $450 per share at the time, and Wall Street was projecting soaring sales and earnings ahead.
2022 turned out differently thanks to pressures like inflation, slowing consumer spending, and a move away from e-commerce following nearly two years of all-digital shopping. Those trends helped push Lululemon's stock price down to about $320 by early 2023, or about 30% below its record.
Let's take a look at whether that move creates an enticing buying opportunity for investors seeking growth today.
Winning in a tough environment
There's no doubt that conditions have worsened in the athleisure apparel industry. Nike reported slowing sales trends and warned about too much inventory leading to price cuts in many niches. Other retailers like Target have reduced their outlooks, too.
But Lululemon has managed to stay above these challenges so far. Sales in the most recent quarter, which ran through late October, were up a healthy 28%. Yes, the company saw weaker growth in the core U.S. market. But overall sales gains have been strong throughout 2022.
NKE Operating Margin (TTM) data by YCharts
Gross profit margin has been another standout, having risen to 56% of sales from 55% of sales a year ago. Lululemon's operating profitability is near 20% of sales compared to the low single digits at Target right now.
"Our ongoing momentum is a testament to our innovative products, deep community relationships, and the hard work and dedication of our talented teams," CEO Calvin McDonald said in an early December press release.
The holiday season
The company also has a good shot at closing the year out on a strong note in the all-important holiday shopping season. Nike in late December raised its short-term growth outlook after posting much faster sales gains through late November. That optimism reflects continued robust spending by consumers on premium footwear and apparel even as shoppers look to save cash in other parts of their budgets.
Investors won't know for sure whether Lululemon had a bright fourth quarter until the company's March earnings report. Currently, Wall Street pros are predicting that revenue gains will remain strong at roughly 28% through the end of the fiscal year.
The buy thesis
Investors can look past those short-term results and focus on the many ways in which Lululemon's stock can generate strong returns over the next several years. The company has room to push into new geographies and new demographics and has demonstrated its ability to do both in recent years. And profitability has steadily improved through a wide range of selling conditions, including weaker economic growth through most of 2022.
While a recession would surely threaten that momentum, the business seems likely to return to a solid growth pace along with the next economic expansion cycle.
That's the best an investor can hope for with a consumer discretionary stock like Lululemon. As a result, shares look attractive today when you consider its market-thumping growth momentum paired with the 30% discount that Wall Street is offering for the stock.
