With 2022 characterized by rampant inflation, forcing the Federal Reserve to start rapidly hiking interest rates, some of the most speculative stocks were hardest hit. And both the S&P 500 and Nasdaq Composite ended the year down double-digit percentages.
Among the worst-performing areas of the market were growth stocks, which oftentimes rely on buoyant macro conditions for their underlying businesses and stock prices to do well. But I don't think investors should completely ignore these high risers based on one down year.
In fact, there's one thriving company that every investor should take a closer look at today. Here's why Lululemon Athletica (LULU 1.59%) is my top growth stock to buy right now.
Strong momentum
In its fiscal 2022 third quarter (ended Oct.30), Lululemon's revenue jumped 28% year over year to $1.9 billion. And diluted earnings per share soared 39% to $2. Both of these figures highlight how well the business is performing in the face of weaker macroeconomic conditions that most other companies have been calling out recently.
Both Lululemon and its larger rival Nike have had to deal with an inventory glut in recent quarters; they have been trying to rebalance their merchandise levels following pandemic-related supply chain disruptions in 2021. But the impact has been more severe for Nike as it had to resort to elevated markdowns and promotional activity to move excess product. Its gross margin shrunk by three percentage points in the latest quarter.
To be fair, Lululemon also had to implement promotions, but it didn't seem to have too much of a negative impact on the company's financials. While the company's gross margin decreased slightly to 55.9%, the operating margin actually expanded to 19%.
I think these developments shine a spotlight on just how powerful of a brand Lululemon has created in the cutthroat clothing industry. Between fiscal 2016 and fiscal 2021, the business increased sales 167%, with net income skyrocketing 222% during the same time.
This growth is impressive without a doubt, but Lululemon's focus on a more direct-to-consumer (DTC) distribution model has helped drive the image of a premium product offering. In the most recent quarter, Lululemon generated 41% of its overall revenue from the DTC channel, giving the business more control over pricing and how the consumer perceives its merchandise.
As we've seen, even in challenging and uncertain economic times, Lululemon seems to have no problem boosting its top and bottom lines.
High expectations
Although Lululemon's past financial results are nothing short of outstanding, the leadership team has its sights set on future growth opportunities. According to the company's "Power of Three x2" outlook, which was introduced in April of last year, the overarching goal is to double Lululemon's annual revenue from just under $6.3 billion in fiscal 2021 to $12.5 billion in fiscal 2026. That translates to roughly 15% gains on a yearly basis.
Key pillars of this objective are to double men's apparel revenue, double digital revenue, and quadruple international revenue. Maintaining competitive strength in Lululemon's core areas, like the women's category, physical stores, and North American operations are also critical to the plan.
Lululemon previously introduced a "Power of Three" strategy in April 2019, only to achieve its targets well ahead of schedule. While it's really anyone's guess if the business can handily hit these fiscal 2026 goals, there's a real possibility that management may have underpromised with its outlook. This could mean even greater upside for the financials and the stock as well.
Zooming out a bit, the global athletic apparel market is estimated to be worth about $380 billion today, according to data from Statista. Based on its trailing-12-month revenue of $7.5 billion, this gives Lululemon a tiny 2% share of the total industry and plenty of leeway to continue taking market share in the years ahead.
However, investors need to understand that because Lululemon is on the premium side of the equation, it's total addressable market will be somewhat limited, especially when compared to Nike or Adidas. The caveat to this caveat is that Lululemon could be expanding the market and bringing in customers who aren't strictly in the sports apparel segment and are instead looking simply for quality and comfort. Lululemon did usher in the "athleisure" category, after all.
All of this is to say that the business is firing on all cylinders right now. And there's still a sizable growth opportunity as we look ahead. This makes the stock a worthy addition to anyone's portfolio.
