It's safe to say that Lululemon Athletica (NASDAQ: LULU) is firing on all cylinders right now. In its latest quarter (Q4 2022, ended Jan. 29), the athletic wear maker posted year-over-year revenue growth of 30% along with a 31% jump in adjusted diluted earnings per share (EPS) to $4.40.
The latest financials exceeded Wall Street's expectations, sending shares 12% higher after the market closed. But this isn't just a one-hit wonder performance. The stock is up an incredible 307% over the past five years, crushing the S&P 500. And Lululemon continues to successfully navigate an uncertain economic period.
Here's why it's a magnificent growth stock that can supercharge your portfolio.
Facing numerous challenges
Like every other business out there over the past three years, Lululemon has dealt with the coronavirus pandemic, supply chain bottlenecks, surging inflation, and rising interest rates. But this seemingly unfavorable backdrop hasn't done much to stop the company's monster gains. Between fiscal 2019 and the just-reported 2022, revenue increased over 100% from $4 billion to $8.1 billion. During this same period, operating income more than doubled as well.
And based on the latest financial results, Lululemon continues posting double-digit revenue and earnings growth. Propelling the company is more than 23% annualized growth over the past three years for both the men's and women's segment.
And at a time when businesses struggle with uneven pandemic-related recoveries and adverse foreign currency rates, Lululemon posted fiscal 2022 fourth-quarter sales growth of 29% in North America and 35% internationally. Direct-to-consumer (DTC) sales, which measure e-commerce revenue for Lululemon, accounted for 52% of the overall business in the latest quarter, a trend that can bolster the brand's strength.
It's hard to beat these types of broad-based gains.
Wonderful prospects
Looking at fiscal 2023, management expects revenue to come in between $9.3 billion and $9.41 billion, better than consensus estimates by more than $200 million (at the midpoint). And by fiscal 2026, the leadership team's goal of eclipsing $12.5 billion of annual revenue hasn't changed. By leaning on growth of the men's line, international operations, and DTC segment, Lululemon likely won't have a problem accomplishing this ambitious feat.
This is a fantastic outlook no matter how you look at it, to be sure, and it's something that shareholders can have even greater confidence in, given how resilient Lululemon has been over the past three years. A global pandemic, supply chain problems, record inflation, and higher interest rates weren't enough to stop this business, so what could get in the way of Lululemon reaching its financial targets?
There is one caveat to this positive perspective, and that is the very real possibility of a severe recession some time this year or in 2024. No one knows with any level of certainty what the near-term economic situation will look like. Easing investor worries is the fact that Lululemon was unscathed during the Great Recession as revenue soared 30.9% in fiscal 2008 and 28.1% in 2009, both outstanding growth rates given the economic turmoil happening at that time.
Furthermore, Lululemon is on solid financial footing, which should help it easily make it through a recessionary period. The company's average gross margin and operating margin of 56.4% and 18.8%, respectively, over the past three fiscal years provides ample cushion to weather whatever storms may come. This has allowed the business to generate copious amounts of free cash flow. Having zero debt on the balance sheet also helps tremendously in times like now.
Even with the stock's outperformance in recent years, Lululemon's current price-to-earnings ratio of 35 is roughly on par with its bigger rival, Nike, whose shares trade at a P/E of 34 right now. On a forward-looking basis, Lululemon's shares are significantly cheaper than Nike's despite the former having much better growth potential. This presents investors with a worthwhile buying opportunity.
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Neil Patel has positions in Lululemon Athletica. The Motley Fool has positions in 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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
