Not for the first time, Lululemon stock looks on track for a bull rally. The stock has been slowly going down by more than 50% from its all-time highs. This volatility has brought a massive money-making opportunity, but it does come with its fair share of risk.
Lululemon Athletica Inc. is known for its premium athletic wear, carrying a special appeal to younger people. What makes the company unique is its strong brand identity which is centered around yoga and fitness, with innovative proprietary fabrics and its goal of providing a retail experience that combines retail with fitness spaces to allow customers to try out products in real-life scenarios. It was founded in 1998 and is based in Vancouver, Canada
The company’s primary products include athletic apparel like yoga pants, shorts, tops, jackets, and leggings. It also sells women’s and men’s shoes, accessories such as yoga mats, bags, and water bottles, and personal care products, including basic balm, dry shampoo, and face moisturizer.
It has a global presence with over 700 stores worldwide. These stores generate 70% of the revenue, with the remaining coming from online sales. Athletic apparel makes up about 70% of total revenue, accessories contribute approximately 10%, and footwear adds around 5% to the top line.
United States and Canada account for 71% of Lululemon’s revenue, but the company also has operations in Europe, the Middle East, Asia, and Africa. The company’s top clients include fitness enthusiasts, yoga practitioners, and consumers seeking high-quality athletic wear.
When the company’s stock price halved from its all-time highs, it did so for good reasons. High inflation has made people think before buying what is essentially luxury sportswear. Moreover, newer brands like Alo have grabbed market share quickly, which means Lululemon simply cannot trade at the same market premium it used to enjoy.
Its quarterly results also show declining sales in North America. Growth in China is slowing down. The company has lowered its EPS guidance for this year by 2%, from $14.37 to $14.05. Revenue guidance has also gone down 3%.
In my view, this negativity is giving investors a chance to get in at a good price. The company still enjoys 60% gross margins. It usually doesn’t rely on promotional discounts to sell its products, but even if it had to, there is ample room in the margins to pull that off.
The company’s forward PE of just over 20 is also now in line with the S&P 500. Yes, the company is losing its edge in the market and with it the premium valuation as well. But it hasn’t yet lost it. Even a small recovery can translate to a multiple expansion, bringing in handsome rewards for investors.
LULU is not on our latest list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 2 hedge fund portfolios held LULU at the end of the second quarter which was 2 in the previous quarter. While we acknowledge the potential of LULU as a leading investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as LULU but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
Disclosure: None. This article was originally published at Insider Monkey.
Hedge Fund Resource Center