Investors have a palpable fear of missing out as markets soar like they have last year. After all, it’s hard not to feel regret if you don’t own top-performing stocks that double or triple the return of the market as a whole.
Of course, it is not possible to know in advance which stocks will see a rise in the short term. Investors can, however, get clues to this performance potential, usually in the form of market share growth and unusually high profit margins.
There is one company that is making these financial gains today, but has been sidelined due to fears of slowing growth in the future. This combination of impressive financials and compelling valuation could lay the foundation for excellent returns to come. You might look back in a few years and regret not choosing this highly profitable retailer. Let’s look at some reasons why Lululemon Athletica (NASDAQ:LULU) worth revisiting as a stock buy.
Challenges
Lululemon’s quarterly update from late March contained troubling news about the company that formed the basis for lackluster stock performance of late. First-quarter sales growth slowed to 9% in the main U.S. market, compared with 12% in the previous quarter.
This was a better result compared to peers such as Nike (NYSE:NKE), which reported flat sales during its fiscal third quarter. But Lululemon stock was priced for faster growth, and it was shocking to investors to see management projecting single-digit sales growth for the current quarter, down from 30% gains earlier in the year. Last year.
Shareholders are understandably concerned that there is even more room for the stock to fall, since Lululemon is priced at a premium of 5 times annual sales compared to Nike’s valuation which is less than 3 times sales.
Looking further
The retailer is much closer to the start of its growth journey than the end. Starting with international sales, which increased by 56% last quarter. This figure shows the extent to which the Lululemon brand resonates outside of its most mature markets, namely Canada and the United States. However, international sales today represent only 20% of activity, compared to more than 60% for Nike. It’s a long runway for growth.
Meanwhile, Lululemon is making smart, deliberate moves into new product categories and demographics. Recent hits include outerwear and footwear. The chain is also expanding beyond its core female demographic into children’s and men’s clothing. These moves will help the chain grow its annual revenue by about $10 billion and reach Nike’s $50 billion level.
Pricing and Finance
Lululemon announced stunning financial results for fiscal 2023. Revenue soared 20%, gross profit margin jumped 3 percentage points to 58% of sales, and adjusted operating profit margin improved to 23% of sales compared to 22% of sales a year earlier. Each of these metrics made it an industry leader and reflected valuable competitive advantages such as customer loyalty and pricing power.
Indeed, the next financial year will be disappointing compared to these impressive figures. It is much more difficult to increase profitability when sales growth is closer to 10% than 20%. Investors shouldn’t let this temporary crisis keep them away from this stock, however.
Lululemon shares could remain volatile as Wall Street tries to predict the exact timing of its growth rebound. Patient shareholders can look past this outlook and instead focus on buying shares of this solid retailer at a discount.
Should you invest $1,000 in Lululemon Athletica right now?
Before buying Lululemon Athletica stock, consider this:
THE Motley Fool Stock Advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now…and Lululemon Athletica was not one of them. The 10 stocks selected could produce monster returns in the years to come.
Consider when Nvidia made this list on April 15, 2005…if you had invested $1,000 at the time of our recommendation, you would have $578,143!*
Equity Advisor provides investors with an easy-to-follow plan for success, including portfolio building advice, regular analyst updates, and two new stock picks each month. THE Equity Advisor the service has more than quadrupled the return of the S&P 500 since 2002*.
See the 10 values »
*Stock Advisor returns May 13, 2024
Demitri Kalogeropoulos holds positions at Nike. The Motley Fool posts and recommends Lululemon Athletica and Nike. The Motley Fool recommends the following options: Long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.
In a few years, you’ll want to buy this high-growth stock was originally published by The Motley Fool
