In the past decade, shares of Lululemon(NASDAQ: LULU) have catapulted 660% higher (as of July 22). That gain trounces the total return of the S&P 500 during the same time. However, it's been a disappointing run in the past several months.
As of this writing, this apparel stock trades 44% off its December 2023 peak price, selling at a forward price-to-earnings ratio (P/E) of 19.9. This represents a discount to the overall S&P 500. But before you rush to buy shares, here are three things you must know about Lululemon first.
1. Premium brand
Perhaps the most important characteristic investors need to know about Lululemon is its industry positioning. There's no question that this is a premium brand in the sportswear market. Lululemon sells expensive, high-quality products that consumers have shown a willingness to pay up for historically.
This provides pricing power. Lululemon reported a fantastic gross margin of 57.7% in the fiscal 2024 first quarter (ended April 28). That's higher than industry peers like Nike (gross margin of 44.7%), Adidas (51.2%), and Under Armour (45%).
It helps Lululemon's brand power that the company relies almost exclusively on its network of 711 company-operated stores and its e-commerce channel to sell merchandise. Competitors depend heavily on wholesale partners. But in this case, Lululemon's distribution strategy allows management to maintain a tight leash on inventory availability and pricing.
Of course, finding lasting success in the fashion industry is extremely difficult. Consumer tastes are always changing in unpredictable ways. But given Lululemon's long-term relevance, coupled with its success at pioneering the athleisure trend, investors should give the business the benefit of the doubt.
2. Marketing strategy
Lululemon's bigger rival in the industry, Nike, is arguably one of the most successful companies when it comes to executing effective marketing campaigns. The business uses impactful storytelling to get its message across, helping the brand resonate with consumers. Plus, Nike is known for making endorsement deals with some of the world's best athletes, like LeBron James and Cristiano Ronaldo, as well as superstar musical artist Drake.
Lululemon takes a different approach. The leadership team relies on community-driven brand-building techniques. This includes utilizing a network of store and global ambassadors who are usually leaders in their respective communities. Lululemon's stores also help with marketing efforts, offering yoga classes and other personal wellness activities that bring greater visibility to the brand.
3. Financial trends
Over the past decade, between fiscal 2013 and fiscal 2023, Lululemon has posted tremendous growth. Revenue is up an astonishing 500% during this time. While the apparel industry is pretty mature, this business essentially created the athleisure category, which helped it quickly rise in popularity.
Investors might not be pleased with the company's latest financial update. During Q1 of fiscal 2024, Lululemon's sales rose 10%. That's certainly a slowdown from prior quarters. Perhaps even more alarming, growth in the Americas region, the company's key market, was just 3%.
However, I don't think there's reason to panic just yet. The fact that Lululemon could increase the top line by double digits, especially in this type of economic environment, is encouraging. And for the full fiscal year, executives forecast year-over-year revenue growth of 11% to 12%. If that guidance proves accurate, there's a lot for shareholders to be optimistic about.
Lululemon's long-term outlook also remains robust. Management believes there is a lot of potential for awareness of the brand to expand outside the U.S. and Canada, as well as draw in more male consumers. Of note, sales were up 52% in China in the latest fiscal quarter, indicating a long runway ahead in that country.
Investors looking to scoop up shares of Lululemon on the dip should now have a better understanding of the business.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica and Nike. The Motley Fool recommends Under Armour and recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.
