Investors looking for the next big thing may miss out on the sure thing. A company with slowing sales growth may look like it's past its prime, and investors could move on to another high-growth stock. But it's often the winners that keep on winning, and with less risk. Consider that investing legend Warren Buffett only bought shares of Amazon through his holding company, Berkshire Hathaway, in 2019 -- way after it had already gained thousands of percentage points.
Lululemon Athletica (LULU 0.80%) is a niche athletic wear company that has taken the markets by storm since going public in 2007. Is its growth story over? Or is this a winner you don't want to lose out on?
How Lululemon shot to the top of athleisure
As with any top company, Lululemon's wild success has come from a mix of factors. It produces premium athletic wear that appeals to an upscale crowd looking for exclusive, high-quality products. Its branding is cohesive and community-building, and it uses patented fabrics that its customers really like. These shoppers are willing and able to pay premium prices.
Also, much of its merchandise is non-seasonal, and that also reduces the need to mark prices down at the end of a season. This has led to high profits and comfortable margins. Consider its operating margin as compared with industry leader Nike.
LULU Operating Margin (TTM) data by YCharts
Lululemon also leaned into omnichannel shopping early on, and digital sales usually account for a majority of sales -- 52% in its 2022 fourth quarter (ended Jan. 29). It uses its digital presence to engage with fans as a pillar of its loyalty-building growth strategy.
Proving the naysayers wrong
Financial performance has faltered a bit in the wake of high inflation, and the stock dipped as well. But the company still reported a dramatic end to the year with outstanding fourth-quarter results. That demonstrates two things: Investors shouldn't get too worked up about non-linear growth, and Lululemon is still a top growth company.
Revenue increased 30% year over year in the fourth quarter to $2.8 billion, and adjusted earnings per share (EPS) were $4.40. (The adjustment in the EPS was mostly related to an impairment charge from Lululemon's acquisition of connected fitness company Mirror.) Both numbers beat out average Wall Street estimates.
Margins were still pressured though, decreasing from last year. Gross margin fell from 57.7% to 55.4%, and operating margin fell from 21.3% to 16.4%. Inventory increased 50%, which seems like a lot at first glance. Increased inventory over the past few quarters led to higher markdowns than usual and the margin pressure it's currently feeling.
However, management is comfortable with the inventory position at this point. Forty-five percent of inventory is the non-seasonal merchandise that is the core of the business and doesn't need to be marked down to sell, and the overall inventory growth was lower than expected. Management feels that it is effectively dealing with the increase and expects it to moderate going forward.
Management is projecting growth to decelerate in 2023 as the economy remains volatile. Revenue increased 30% in 2022, and management is guiding for an increase of 15% in 2023. EPS is also expected to increase about 15%, from $10.07 to $11.61.
Don't underestimate future growth
Management created a growth plan called "Power of Three," which set the objectives to double men's sales, double digital sales, and quadruple international sales by 2024. It met those goals ahead of schedule and implemented "Power of Three x2," in which it plans to do that all again by 2026.
As much as digital remains Lululemon's biggest growth driver, with sales increasing 37% year over year in the fourth quarter versus 15% for stores, the mix of physical and digital together power the strength of the brand, and store openings are key to strategic growth. The company opened 81 stores in 2022 for a total of 655, and is planning for another 45 to 50 new stores this year.
As for Mirror, maybe it was just terrible timing, but hardware sales are not what Lululemon was expecting. The company is now turning its focus to using the app to increase engagement with its users and drive revenue through that medium. It rebranded the program as Lululemon Studio, and it's offering free and premium tiers.
An attractive entry point
Let's get back to the question of whether or not it's too late to buy Lululemon stock. It's down just 3% over the past year and flat year to date. However, it's still 32% below its high in November 2021. The shares trade at about 27 times forward one-year earnings, lower than Nike's multiple of 30, even though Lululemon's earnings are growing much faster.
If you can zoom out of the current pressure, you should be able to see that Lululemon is harnessing its market opportunity and has plenty of room to run. It certainly has the potential to beat the market going forward. Don't look at the past and see what you missed, but consider this a great time to buy shares before the company climbs up the next rungs of its ladder.
