Stocks of growing companies have fallen well off their highs over the last year. Of course, it's business performance, not the stock, that matters. Despite inflation and other economic headwinds that have hurt some companies lately, there are many other great companies that continue to perform well.
Chewy (CHWY 1.92%), Lululemon Athletica (LULU -1.26%), and AutoZone (AZO -1.45%) are three promising growth stocks that could rise over the next few years and beyond. Let's look at what three Motley Fool contributors have to say about their prospects.
A rising e-commerce juggernaut
John Ballard (Chewy): Chewy is positioning itself as the leading online brand for pet supplies. It's a massive opportunity valued at $130 billion in the U.S. alone. Despite slowing growth across the e-commerce market last year amid inflation and other economic headwinds, Chewy still posted record sales and profits last year. The haircut in the stock price provides long-term investors a great opportunity to jump on board before the e-commerce market recovers.
Management is aiming to capitalize on Chewy's growing popularity with pet owners by expanding into new service offerings. New sales opportunities in health, insurance, and sponsored ads on its website not only could accelerate growth over the next few years, but most importantly, boost the company's profit margin and the stock price.
The company's goals to deliver superior value, "high-touch customer service," and a "maniacal" focus on building brand loyalty with customers suggest that it could dominate the pet industry in the same way Amazon has with general merchandise.
Ahead of these opportunities, the stock is trading at its cheapest valuation since Chewy's initial public offering in 2019. On a price-to-sales basis, the shares trade at 1.39 times the company's trailing sales, which is a good deal for a small, fast-growing e-commerce platform.
This stock's performance shouldn't surprise anyone
Jennifer Saibil (Lululemon Athletica): Lululemon has been an incredible investment over the past few years. The company has posted consistently high growth rates and robust profitability. Investors were tentative, though, after it revised its outlook for the 2022 fourth quarter.
But Lululemon reported fourth-quarter earnings this past week, and they were better than expected, trouncing Wall Street estimates. Analysts had expected $2.7 billion in sales and $4.26 in adjusted earnings per share (EPS), and the results came in at $2.8 billion in sales and $4.40 in EPS. Sales increased 30% both for the quarter and the full fiscal year (ended Jan. 29).
Lululemon's successful formula starts with its premium products that target an upscale and resilient market. It's core, non-seasonal product line stays relevant and drives full-price sales. This contributes to wide, profit-generating margins. However, it's also constantly innovating in fabric and style to stay on-trend. It's also heavily invested in its digital presence, and digital sales typically represent about half the total -- 52% in the fourth quarter. Digital sales growth was also more robust, increasing 37% versus 15% for physical stores. However, the omnichannel program remains a pillar of its model, contributing to the Lululemon community of loyal fans.
Management has developed the "Power of Three" strategy to double total sales through doubling men's and digital sales, and quadrupling international sales. It's meeting those goals through a focus on the customer experience, product innovation, and expanding its markets. It already met its original iteration of doubling sales ahead of schedule, and it's now in phase two of the same strategy to double sales in the five years ending in 2026.
It's not all roses. Both gross margin and operating margin contracted year over year in the fourth quarter due to increasing inflationary pressure, and management is expecting sales to decelerate to about 15% growth in 2023. But it's still expecting EPS to increase, from $10.07 in 2022 to about $11.61 in 2023.
Lululemon stock already jumped after the report, but even at the current price, which is up 13% this year, Lululemon stock looks like a bargain when viewed within the context of its growth potential. Shares trade at just 40 times trailing-12-month earnings, far below the three-year average of 57.
LULU PE Ratio data by YCharts
Take a trip to the repair shop
Jeremy Bowman (AutoZone): Almost every stock market sector seems fraught with uncertainty these days. The financial sector looks like a no-go after multiple bank failures. Tech stocks have gotten crushed by higher interest rates and a slowdown in demand. Real estate is also facing pressure from higher rates, while sectors like energy, industrials, and consumer discretionary are notoriously cyclical.
If you're looking for a safe harbor in today's market, one stock that stands out is AutoZone, which has been an excellent steward of capital over its history and also benefits from the recession-proof nature of the auto parts industry. In tough times, consumers tend to delay buying new vehicles and instead spend money repairing and maintaining their current set of wheels.
With interest rates having soared and new car prices up substantially, the average monthly payment on new or used vehicles is at all-time highs, putting even more pressure on car sales. While that kind of economic environment might be problematic for the overall economy, it's good for AutoZone, which just posted another round of strong results.
In its fiscal second quarter, its most recent quarter, the company reported same-store sales growth of 5.3%, or a two-year stack of 19.1%. The company also delivered 7% operating income growth and a 10.5% increase in earnings per share to $24.64. The company has long been committed to buying back stock and repurchased $906 million worth of stock in the quarter.
Finally, the company continues to grow its brick-and-mortar footprint, adding 36 stores in the quarter to bring its grand total to more than 7,000.
At a price-to-earnings ratio of 20, AutoZone's valuation is in line with the S&P 500, but cheaper than a number of safe stocks in sectors like consumer staples. That makes it a great choice during uncertain economic times like the current one.
