It's not typical to see a business continue to post impressive financial results each and every quarter, despite what's happening with external macro or industry forces. Lululemon Athletica (LULU 1.31%) is one such company, and it has stood out from the crowd in recent years.
Because of its strong fundamental performance, the shares have been a massive market outperformer. In the past 10 years, they have skyrocketed by a magnificent 828%. For comparison's sake, the Nasdaq Composite's total return during that time is 315%.
Here are three reasons this booming apparel stock is a no-brainer buy for your portfolio right now.
Strong brand presence
In the global sportswear market, there's no company that holds more sway than industry heavyweight Nike. It has been one of the most widely recognized brands for decades.
However, in more recent times, Lululemon has built up its own powerful brand presence. Instead of relying on expensive and high-profile celebrity and athlete endorsements, Lululemon's advertising strategy focuses on community-driven and grassroots marketing. This approach has transformed the business from a seller of popular yoga pants for women into a well-regarded athleisure pioneer.
There's a huge difference between the distribution strategies of Nike and Lululemon. The latter benefits by not relying on third-party retailers or wholesale accounts. Instead, Lululemon generates 41% of revenue from its website, with the rest coming from its 686 company-owned stores. This approach allows for better control of inventory and merchandising, leading to fewer markdowns and other promotional activities.
It also supports the brand's standing in the industry. And that has resulted in tremendous pricing power. In the past five years, Lululemon's gross margin has averaged a superb 50%. That exceeds Nike's 44%.
Impressive financial performance
Another reason to buy Lululemon shares is the company's ability to register strong financial performance. Between Q3 2018 and Q3 2023, revenue and net income increased at compound annual rates of greater than 20%. Even more impressive, despite macroeconomic headwinds over the past couple of years, Lululemon continues seeing its top and bottom lines rise at double-digit clips.
That should give investors confidence that the business can perform no matter what the economic picture looks like. Even for what are considered premium products in the industry, consumers have shown the ability and willingness to spend on Lululemon merchandise. A company that experiences durable demand trends is in good shape to produce outsize investment returns.
As we look ahead, it's easy to be optimistic about Lululemon's long-term picture. At the end of fiscal 2021, management set the goal for revenue to double to $12.5 billion by fiscal 2026. Based on trailing-12-month sales of $9.2 billion, Lululemon looks to be ahead of schedule.
The executive team is focused on further penetrating the men's category, while also boosting digital and international revenue. In the latest fiscal quarter, Lululemon generated 65% of its total revenue in the U.S., leaving lots of untapped potential overseas.
The valuation is compelling
Shares of Lululemon have absolutely crushed it in the past. A $1,000 investment in the stock in March 2018 would be worth more than $3,100 today. While I'm not so sure this performance will repeat itself, investors have every reason to be bullish.
As of this writing, the stock trades at a forward price-to-earnings ratio of 32. That might look expensive at first glance, but consider Lululemon's strong brand, outsize profitability, and growth potential.
Taking into consideration all of those positive factors, the stock looks like a no-brainer buy right now.
