Its growth potential is so clear that Lululemon Athletica (LULU 1.31%) stock rarely goes on sale. Most of Wall Street is aware of the athleisure specialist's competitive advantages, including its steady flow of innovative product releases and its expanding base of highly loyal customers.
Yet the stock has declined 10% since the start of 2024 potentially on worries about what the chain might have to say in its late March earnings report. Investors should do their best to ignore those short-term concerns and focus instead on Lululemon's excellent outlook for the next decade or more.
Getting bigger
Lululemon is having no trouble growing these days, even while many competitors struggle with weak demand. Revenue jumped 19% year over year last quarter, including a 9% comparable-store sales boost and a 19% increase in the digital selling channel. Nike (NYSE: NKE), meanwhile, reported a 1% sales drop last quarter. It's clear which of these two companies is the growth stock right now.
Lululemon is getting a lift from new product launches, as usual, but there are other attractive growth avenues for investors to feel excited about today. The chain's international sales jumped 49% year over year last quarter, for one, suggesting a long runway ahead for this relatively small segment. Lululemon is also pushing into new demographics like menswear, which should expand for many years. As for the short term, most Wall Street pros are looking for sales to rise by 15% year over year when the company announces its fourth-quarter results on March 21.
What to watch with Lululemon
Concerns heading into that report include the potential for weaker demand in 2024. Nike warned investors in late December to expect softer sales in the second half of the year, after all, due to price cuts by many of its retailing partners. It's possible that this slump, which has mostly hurt footwear in recent months, could spread to other athleisure apparel niches.
Two numbers in Lululemon's upcoming report will help investors determine whether the business is still on a robust growth path. The first is revenue, which should land at around $3.2 billion for a 15% increase, year over year. Management boosted its outlook slightly back in January following a strong holiday shopping season. Executives described "balanced" growth across its biggest markets and product categories. Ideally, they'll sound a similarly positive tone in late March.
The other key metric to watch is gross profit margin, which has been rising toward 60% of sales in recent quarters. Continued success here will confirm that Lululemon's pricing power is still strong. A surprise decrease, meanwhile, would mean the industry is getting more competitive as consumers hold out for better deals.
Lululemon's price is right
Lululemon is still priced at a hefty premium following its stock price pullback in 2024. You'll have to pay 6.3 times sales today compared to about 7 times sales at the start of the year. Nike is available at a far cheaper price of 3 times revenue.
As a result, risk-averse investors might want to watch the stock through the volatility around this month's earnings report. Yet I'd view a further pullback as an opportunity to buy this quality business at an even better price. Given its excellent long-term growth prospects, now is a great time to take advantage of Lululemon's attractive stock price discount.
