Is It Time to Buy the Dip in Lululemon Stock?

There's little to complain about Lululemon Athletica's (LULU -0.20%) performance over the last five years. At least, not after excluding the ill-timed acquisition of at-home fitness start-up Mirror during the pandemic. I forgive Lululemon. We all made some regrettable purchases in 2020.

In all seriousness, though, the company is putting up incredible numbers and has become a standout investment in the apparel industry. After the recent stock price dip following the last earnings update for 2023, it's getting harder to ignore this company regardless of whether investors place themselves in the growth or value camp.

A fantastic 2023, chock-full of product goodies

Let's review. Lululemon's rate of expansion outside of its North American home turf is nothing short of incredible for a company of this size. And given that most of its sales are still concentrated in the Americas and China, there's plenty of room for further growth.

Data source: Lululemon. YOY = year over year. 

Even better was Lululemon's ability to scale up its new sales into an even higher growth rate in earnings per share -- up 83% to $12.20. On an adjusted basis, earnings per share were up 27% to $12.77, which, for the sake of better year-over-year business operating comparability, excludes items like the write-down of that aforementioned Mirror acquisition. Either way, profit margins are rising, and that's great for shareholders.

In the last couple of years, I've written about Lululemon's management of inventory during the pandemic, the rollout of new product lines for men and the expansion into women's shoes, and the general strength of the brand as it begins to stretch into new geographies. 2023 was a capstone to that work, showing off exceptional profitability for this company, even if investors were collectively disappointed with guidance for "only" about 11% to 12% revenue growth for 2024.

Is Lululemon a best bet on sports and apparel?

Though shares sold off on management's outlook for the year ahead, it's important to take note that the previously stated goal of doubling 2021 sales to $12.5 billion by 2026 is still easily within reach. There are all sorts of levers Lululemon can pull to get there. Simply expanding into new regions of the planet is the primary driver. The company continues to gradually open new stores and grow its e-commerce footprint.

And again, while it might be easy to worry about the deceleration in the top-line trajectory, Lululemon's core strength is better than ever. Earnings per share are expected to be at least $14, representing an increase of about 15%. This excludes any positive impact from ongoing share repurchases ($555 million repurchased in 2023), which Lululemon is fully capable of doing more of given it generated over $1.6 billion in free cash flow last year. The company additionally had $2.24 billion in cash and short-term investments and zero debt on balance.

After the post-2023 earnings dip, I say Lululemon stock is a fantastic buy right now. Shares trade for 32 times trailing-12-month earnings per share, or about 30 times free cash flow. I plan on adding to my position in this top apparel stock in April.