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Lululemon Athletica(LULU-Q)
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Here's My Top Growth Stock to Buy Now

Motley Fool - Sat Jul 23, 10:15AM CDT

The recent market turmoil -- spurred by the Federal Reserve's intention to aggressively raise interest rates in an effort to curb soaring inflation -- has caused investors to flee risky sectors in favor of safer ones. Yet, there are some outstanding businesses that can be purchased at discounts to their recent highs.

Consider Lululemon Athletica(NASDAQ: LULU). While investors have soured on it amid a challenging macroeconomic environment, the apparel business continues to exhibit strong fundamentals and continued momentum. And with the shares down 22% this year, this is my top growth stock to buy right now.

Lululemon has been a big winner for investors

Over the past five years, Lululemon has produced a return of 396% for shareholders, easily crushing the S&P 500's 75% gain during the same time frame. This performance can largely be attributed to the company's outstanding fundamentals and growth trajectory. Lululemon's revenue and earnings per share (EPS) increased at an annualized rate of 21.7% and 27.6%, respectively, between fiscal 2016 and fiscal 2021. What's more, the athleisure brand's direct-to-consumer business is thriving, representing 45% of overall sales.

What started as a seller of fashionable and functional yoga pants for women has now become a popular lifestyle brand characterized by a focus on comfort, style, and high-quality materials. Demonstrating Lululemon's reduced reliance on women's clothing, over the past three fiscal years, the men's segment, growing at a compound annual rate of 30% per year, has actually outpaced the women's segment.

Just recently, Lululemon announced its entry into Spain, with the intention of opening two brick-and-mortar locations, one in Barcelona and one in Madrid, as well as a local e-commerce site. This would be the company's first foray into Europe since 2019.

And before that, the business jumped into the footwear business, launching the Blissfeel, a running shoe for women. "We were proud that it was named the best women's specific shoe in 2022 by Runner's World," said CEO Calvin McDonald. "The response has been enthusiastic." More women's footwear designs are planned for release, with a men's line coming soon.

Lululemon's outlook remains bright

What's remarkable about Lululemon right now is that the business shows no signs of slowing down. While many other companies are experiencing decelerating growth, whether it's from tough year-ago comparisons or because of waning consumer confidence in the face of a looming recession, Lululemon continues shining. Sales jumped 31.6% in the fiscal 2022 first quarter, and this was compared to an 88.1% increase in Q1 2021.

Looking ahead, investors still have plenty to get excited about now. Lululemon's management recently announced a new, five-year financial plan called the "Power of Three x2" initiative. Building on a previous outlook that the business easily beat, Lululemon has three primary milestones to achieve by fiscal 2026.

The three pillars of growth will be to double men's revenue, double digital revenue, and quadruple international revenue. Lululemon's women's segment, its physical footprint of 579 stores, and operations in North America will still be incredibly important to the success of the business. But the company has a ton of growth potential in front of it, and putting the foot on the gas pedal is the right strategic move, especially if Lululemon wants to catch up to the behemoth in the sportswear market that is Nike.

If Lululemon is able to hit these targets and double its revenue between fiscal 2021 to fiscal 2026 to $12.5 billion, then the stock is poised to do very well for investors. The shares are currently trading hands at a price-to-earnings (P/E) ratio of 38, which is meaningfully below the trailing five-year average of 54. Consensus Wall Street analyst estimates call for EPS to increase at a compound annual rate of 18.2% over the next five years. Therefore, there is room for the P/E multiple to compress and the stock to provide an outstanding return for investors.

It's certainly not an easy time to be in the stock market, but there are still some great companies to own out there. Lululemon is one of them.

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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 has a disclosure policy.

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