Apparel is a hypercompetitive business. Going through boom and bust trends, the apparel shopper can switch habits on a dime, sometimes to the detriment of investors. Lululemon (LULU -2.42%) investors are feeling this volatility at the moment. The stock is off 43.5% from recent highs as of this writing due to a huge slowdown in its core North American market. Wall Street is worried about upstart competitors taking share in the athleisure space and wondering whether Lululemon's best days are behind it.
But perhaps Wall Street's reaction is overblown. Is Lululemon stock a buy, down over 40% from all-time highs?
Stagnating North America, booming foreign sales
In its most recent quarter that ended in April, Lululemon showed a geographical divergence for its athleisure business. North American sales are stagnating -- growing only 3% year over year -- while international revenue is booming.
North American sales growth has slowed down considerably likely due to the rise of new athleisure brands such as Vuori and Alo Yoga. According to various analyst reports, both these brands are gaining share with athleisure shoppers in North America. Lululemon isn't necessarily losing share (most of the gains are coming at the expense of flailing brand Under Armour), but it is still something investors have grown concerned about. On a positive note, Lululemon is growing rapidly with its men's clothing and believes it can retain customers with its fast-growing membership program (which currently has 20 million members).
International revenue is much more healthy and taking off like a rocket right now. Revenue outside of North America increased 40% on a constant-currency basis and hit $2.1 billion over the last 12 months. Since November of 2020, Lululemon's international revenue has grown at a 47% clip. With a growing presence in places such as Europe, Australia, and East Asia, Lululemon's international segment still has a long runway left to grow.
NASDAQ: LULU
Key Data Points
How big can this business get?
Even though Lululemon is facing heightened competition in North America, it is still one of the top brands in the market and seems to be hitting escape velocity outside of the United States and Canada. So, how big can this business get?
Lululemon generated $9.8 billion over the past 12 months. Nike -- the largest apparel brand in the world -- generated over $50 billion. If Lululemon is going to be one of the next global-apparel brands alongside Nike and Adidas, there is plenty of room for Lululemon to double or even triple its sales. Plus, the entire athleisure category is growing around the globe as people get more comfortable ditching suits and wearing yoga pants and tennis shoes to the office. This should bode well for all these brands.
LULU Revenue (TTM) data by YCharts.
The stock is cheap, if you still believe in the brand
Lululemon looks like a solid buy here if you believe the brand is durable over the long term. Today, the stock trades at a price-to-earnings ratio (P/E) of 23, which is below the S&P 500 index average of 29. This is one of the lowest P/E ratios Lululemon has traded at in years. In fact, not since 2016 has the stock reached an earnings ratio of this level.
Historically, Lululemon has posted much better revenue growth than the market average. In fact, it is still growing quicker than the market average, with sales growth over 10% last quarter. This impressive and durable revenue growth along with margin expansion has led to earnings-per-share (EPS) growth -- the key driver of stock performance over the long term -- of 650% in the last 10 years.
The stock trades at a discount, and the business has historically grown its earnings at a fast clip. For all these reasons, I think Lululemon is a solid buy-the-dip candidate at this price range.
