Costco (COST 1.57%) has a habit of proving the skeptics wrong. Having started 2024 at a premium price compared to its rivals, the warehouse retailer has gone on to outperform peers again while touching new highs. Shares are up a blazing 45% in the past 12 months compared to Walmart's 20% gain.
Costco has a good shot at maintaining that positive momentum. However, many investors are concerned about its premium valuation and what that might mean for returns going forward. If you're among them, then consider a few relatively cheap retailers instead. Read on for some excellent reasons to like Ulta Beauty (ULTA 0.01%) and Lululemon Athletica (LULU 1.24%) shares right now.
1. Buy this beautiful stock
Ulta Beauty is doing just about everything right for its business, and yet investors have still punished the stock in recent months. Sure, the spa and beauty products retailer is growing sales more slowly right now. Makeup and skincare shoppers just aren't spending as freely today and peers have responded by cutting prices. As a result, Ulta shareholders have had to accept slower revenue growth and weaker profitability.
These trends are still impressive, though, with Ulta on track to boost comparable-store sales by 5% this year following last year's 16% surge. The even better news is that profitability is holding steady at over 14% of sales -- far above the 3% rate that Costco enjoys. And the industry will recover, just as it has from all previous downturns. "We are optimistic about the resiliency of the beauty category," CEO Dave Kimbell told investors back in March.
While they wait for that rebound, investors can purchase this stock at a beautiful price. Ulta's shares are valued at less than 2 times revenue, which is near the lowest premium in the past year and well below its pandemic-era record. Costco's valuation, in contrast, is sitting near an all-time high today.
2. Stretch for these returns
Lululemon stock currently sports the cheapest valuation that investors have seen in years. Yet the athleisure apparel specialist is still thrilling its core shoppers. Revenue stretched 16% higher last quarter thanks to a combination of an expanding store base and 12% higher comparable-store sales.
It's true that these gains aren't as impressive as shareholders have seen in recent months. Sales in the U.S. are especially weak, landing at a 7% uptick this past quarter compared to the previous three-month period's 14% surge. It turns out that Lululemon isn't immune to the changes in consumer spending habits that have hurt most retailers in early 2024. These issues might pressure growth through the rest of 2024.
If you can look past that short-term volatility, you could earn some great returns from simply holding this retailer stock. Lululemon's biggest growth avenues include its push into international markets along with its entry into new product categories and demographics. The chain's sales outside of the U.S. rose to 9% of total revenue last quarter, after all, leaving plenty of room for further expansion.
Meanwhile, profitability is stellar. Operating income sits at well over 20% of sales, blowing away Costco's rate and landing at roughly double Nike's figure. Lululemon's path back to strong returns might not be linear, but the beaten-down retailer is highly likely to return to form as the industry recovers in the coming quarters.
