Starbucks (SBUX +0.79%) and Lululemon Athletica (LULU 0.96%) are top brands with a lot of growth left in the tank. However, both stocks recently sold off following weak sales guidance by both companies. Both stocks are currently down about 37% from their previous peak.
While these stocks have delivered massive gains for investors over the last few decades, they haven't moved up in a straight line. Lululemon shares have fallen 30% or more off their high six times in the last decade. A dip of this magnitude is rarer for Starbucks shares, which have fallen this much only four times in the last 20 years.
Here's why these stocks are worth buying on the dip.
1. Starbucks
Starbucks is one of the most iconic consumer brands around. It has more than 38,000 stores worldwide, but management is planning to expand that number to 55,000 by 2030.
Starbucks didn't get to where it is today without hitting some bumps in the road. Since 1971, the company has experienced several economic recessions but has kept on growing. It's currently experiencing another rough patch, with weak consumer spending trends sending revenue down 2% year over year last quarter.
NASDAQ: SBUX
Key Data Points
The issue isn't pinned down to a single geography. Management reported weakness in North America and the Middle East and a slower-than-expected recovery in China. Management still expects to report positive sales growth this year, just not as much as previously estimated. It now calls for full-year revenue to grow at a low-single-digit rate, down from previous guidance for growth between 7% to 10%.
Nothing has changed the company's long-term goals. International is still a big opportunity for the brand, which outperformed the North American market last quarter. There's a great opportunity in India, where management is planning to operate 1,000 stores by 2028.
The bad news in the near term means the stock is now trading at its best value in years. Investors can buy the stock at a discounted forward price-to-earnings (P/E) ratio of 22, which is attractive against Wall Street's long-term projection for double-digit annualized earnings growth.
2. Lululemon Athletica
Similar headwinds are hurting Lululemon, but it's a testament to this athletic brand's strength that, in a soft-demand environment, the company is still capable of growing revenue at double-digit rates. It posted a revenue increase of 16% year over year in the fiscal fourth quarter last year, and management expects this year's revenue to grow 11% to 12% year over year.
Lululemon was built from the ground up. Since opening its first store in Vancouver more than 20 years ago, it has used local marketing strategies, such as in-store classes, marathons, and other events, to win loyal customers. This strategy has turned it into a global growth phenomenon.
NASDAQ: LULU
Key Data Points
Lululemon can grow for a long time, given that the athletic wear industry is estimated to be worth more than $350 billion, according to Statista, and still growing. There are a lot of places around the world that still don't know about the brand yet. The company plans to open 30 new stores outside of North America this year.
The recent sell-off in the shares is undervaluing the brand's long-term opportunity. On the recent earnings call in March, management mentioned that there is a relative lack of brand awareness in most markets. Lululemon has an expanding assortment of products covering a range of activities, including the recent introduction of its first footwear line, that can appeal to a large customer base.
The shares trade at an attractive forward P/E of 21, with Wall Street analysts projecting earnings to grow at an annualized rate of 13% per year.
