Shares of Lululemon Athletica (LULU 0.96%) surged over 10% after its recent earnings report although the stock is still down over 30% from its all-time high. The company just reported fiscal fourth-quarter revenue and earnings per share that came in above analysts' consensus estimates.
The brand's growth through a difficult stretch for the economy only bolsters the investment case for the stock. Let's review what's working for the fast-growing athletic apparel brand and why investors should consider buying the stock today.
NASDAQ: LULU
Key Data Points
Impressive performance
Leading e-commerce brands have reported sluggish growth over the last year. If the impact of high inflation was going to show a weakness in Lululemon's armor, we would have seen it by now.
However, for its fiscal 2022 fourth quarter (ended Jan. 29), Lululemon reported revenue and adjusted earnings growth of 30% year over year, with 52% of revenue coming from its direct-to-consumer (e-commerce) channel. Despite the macroeconomic headwinds, it was impressive that revenue grew faster than the year-ago quarter's 23%.
The company made significant strides with new and existing customers. Transaction growth with new purchasers increased by 30% in the fourth quarter, while increasing 35% with existing customers. This was moderately higher than the mid- to high 20% increase for both metrics for the full year.
"Our ability to exceed our annual revenue target in a dynamic operating environment is a testament to the enduring strength of the Lululemon brand," Chief Financial Officer Meghan Frank said.
Lululemon's acceleration stands out in a highly promotional retail environment. For example, Nike had to drive some of its sales with promotions to move excess inventory, which hurt profits. But Lululemon's superior growth in revenue and profits shows it might have the strongest brand in the athletic wear industry.
Growth expectations
Over the last three years, revenue has grown at a 27% compound annual rate. Management launched its new Power of Three growth plan last year that calls for doubling the size of the men's business, international, and e-commerce revenues over the next five years. At this rate, Lululemon is coming in ahead of schedule. It would likely be growing faster if inflation and economic uncertainty weren't cramping consumer spending power.
In the near term, management is keeping its foot on the gas. The company continues to expand its product categories and build on the sales momentum of recently released product collections, especially in footwear.
Since launching its first-ever footwear line in 2022, Lululemon has received positive customer and media reviews. Its planning to launch a new footwear line for men next year.
The writing is on the wall as to where Lululemon (and the stock) is headed over the long term. On a forward price-to-earnings basis, the stock of Lululemon has traded at a discount to Nike since the beginning of the year, despite Lululemon's superior record of growth over the last 10 years, and it's still in the early innings of international expansion.
Data by YCharts
But Wall Street analysts are starting to come around. Citi analyst Paul Lejuez upgraded the stock following the earnings report to a buy rating and expects earnings to grow more than 20% per year through fiscal 2027. That would be enough growth to at least double the stock price, assuming Lululemon shares are still trading at the same forward P/E of 32 (Nike trades at a multiple of 37).
All said, I believe Lululemon is one of the best growth stocks to hold for the long term.
