1 Growth Stock to Buy and Hold in a Market Downturn

Nike (NYSE: NKE) might get all the attention in the athletic apparel industry, but Lululemon Athletica (LULU 1.31%) certainly deserves some appreciation. Thanks to strong underlying business performance, the latter's stock has soared 200% in the past five years, a return that crushes the 46% gain of its bigger rival. 

Even with the huge rise, Lululemon shares remain 16% below their all-time high. This should be viewed as an opportunity, especially for a company that still has sizable potential as we look ahead. Here's why Lululemon is a no-brainer growth stock that investors should buy and hold -- including in a market downturn. 

Showing its resilience 

Look back at the past few years, and investors will quickly notice how consistent this company's financial performance has been. Since the second quarter of its fiscal 2020, when the pandemic was still rattling markets and the economy, Lululemon has posted 12 straight quarters of double-digit revenue growth. On its own, this track record is truly impressive. 

But let's consider what happened in the past three or so years. Of course, there was a global health crisis. Besides that devastating event, there were supply chain issues, surging inflation not seen in 40 years, and rapidly rising interest rates. And now, we are in uncertain economic times with some calling for a recession in the near term. 

Viewing Lululemon's financial performance in this context is even more of a testament to its resilience. Being able to successfully navigate all of those unpredictable headwinds -- things that have negatively impacted other businesses in the industry to a much greater extent -- gives me confidence that Lululemon is a stock that investors need to think about buying when the market takes a hit. 

Premium status 

In order to achieve the level of success that Lululemon has been able to in its industry, a company needs to find a way to stand out from the crowd. This business does just that thanks to its premium brand status -- Lululemon's merchandise is undoubtedly on the higher end. 

In the latest fiscal quarter (Q2 2023, ended July 30), Lululemon posted a stellar gross margin of 58.8%, an indication of the brand's strength. This was an improvement compared to the year-ago period, with management crediting savings on air freight expenses as the key reason. That gross margin metric is even higher than what other premium consumer-facing companies report, including Apple and Ferrari.

While this might be viewed as a negative factor because it can limit the total addressable opportunity when compared to a business that has more mass-market appeal, I believe Lululemon's strong revenue growth proves otherwise. 

Another argument against Lululemon's high-end focus is that in recessionary or inflationary periods, sales could take a major hit as consumers are quick to cut back on discretionary spending when it comes to expensive apparel. Again, the data just doesn't back this up. In fact, the leadership team sees revenue rising between 17% and 18% in fiscal 2023. 

Growth strategy 

The growth story isn't ending anytime soon, because Lululemon has multiple drivers that can help expand the top line. In the next few years, management will focus heavily on bolstering digital, men's, and international sales. 

Lululemon already generates 40% of its sales online, which can benefit margins given there's no store overhead with these transactions. Finding ways to maintain brand presence in this online format is essential. 

This business was founded with a focus on women, but the men's segment has been posting strong growth in recent years. Athleisure is a powerful enough trend that it can be compelling for all types of consumers. Men account for about 25% of company revenue, so there is a long runway to get that to parity with women's sales.

And when it comes to international growth, Lululemon sees China, unsurprisingly, as a big opportunity. Nike has a massive presence there, a playbook that Lululemon can utilize to successfully navigate the world's second-largest economy. The business will continue opening more stores there. 

There's a lot to like about Lululemon, and it's definitely a stock you want to own in a market downturn.