Shares of yoga-wear maker Lululemon (NASDAQ:LULU) have recovered over the past year. With impressive momentum behind its e-commerce business, a solid Q1 result in the books, room for further margin enhancement, and a consumer that may be in a spot to heal over the coming year, Lululemon stock looks enticing. Though the valuation is a tad on the stretched side (please forgive the pun), I believe it can stretch further and remain mildly bullish, especially if that looming recession is off the table.
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Undoubtedly, discretionary retail stocks can get crushed in the face of an economic downturn. More recently, investors have come to terms with the current economic reality (it’s not ideal, but it’s not hideous, as there have been quite a few upside surprises this earnings season!) and the potential bumps in the road that may lie ahead.
Indeed, this is what can happen once a discretionary stock has the opportunity to get all the sellers out at the first signs of trouble. Last year, it was all about the pain to come. This year has been a recovery year that may not be finished rewarding the firms that may have fallen too hard, too fast.
At this juncture, it’s apparent that a strong growth company like Lululemon probably should have never shed nearly half of its value. As the company looks past recent headwinds and inflation-induced woes, Lululemon is one of the retail companies that could explode once it gets fully back on the growth track.
Lululemon to Flex Its Brand and High-Tech Fabrics to Expand Margins
Lululemon may not have a luxury brand, but its athletic attire certainly goes for a premium in good times and bad. Undoubtedly, the strong brand has paved the way for some pretty strong margins. As discretionary consumer spending recovers and the markets become more willing to look beyond the economic slowdown (perhaps with no recession in sight), Lululemon stands out as one of the retailers that may be able to take its margins even higher.
Undoubtedly, Lululemon’s an athleisure pioneer with a logo recognizable across many corners of the globe. However, it’s not just the brand power that can help Lululemon command above-average prices. The company is an innovator that has done a remarkable job of combining functionality with fashion.
Sure, it seems just a tad far-fetched to refer to Lululemon as a technology company that happens to make workout gear. Still, the company markets some new products as boasting “Fabric + Technology.” Scoff at Lululemon’s innovative capabilities as a clothing company, if you will, but consumers are continuing to buy the new offerings coming out of the Lululemon pipeline.
Further, Lululemon’s proprietary fabrics may very well be the greatest source of its moat, a moat that may keep the likes of yoga-wear rivals like Alo at bay.
Amid climbing global temperatures, the cooling, quick-dry Everlux fabric certainly seems well worth the admission price. In any case, you can be sure that lofty economic profits in the yoga-wear space will attract hungry competitors.
Alo Yoga: The New Player on the Block to Keep Tabs On
Lululemon has had its way with athleisure rivals for quite some time. Still, the company cannot afford to be caught flat-footed. Alo Yoga is a new yoga-wear company to keep tabs on if you’re a LULU shareholder.
Like Lululemon, Alo seems incredibly innovative, both on the front of clothing design and in terms of marketing. Various celebrities, including Olivia Wilde, have donned the company’s clothing. That’s pretty much the best form of marketing in the fashion industry, in my opinion!
As Alo continues to make significant strides in the industry (with $1 billion in sales in 2022) while catering mainly toward younger generations (think Generation Z consumers), I believe Lululemon’s moat is not 100% bulletproof. In fact, I view Alo as a credible threat over the next five years.
Alo CEO Danny Harris sees his company as “more like Tesla (NASDAQ:TSLA)” than the “other guys,” which he compared to old automakers. I can’t say I disagree. As younger generations start making money and have discretionary income, it’s possible to see the tides in the yoga-wear space shift.
In the meantime, though, Lululemon has all the tools it needs to retain the lead. The premium valuation reflects this, with LULU stock trading at 51.4 times trailing price-to-earnings, well above the 25.6 times multiple of the apparel retail industry.
Is Lululemon Stock a Buy, According to Analysts?
Turning to Wall Street, LULU stock comes in as a Moderate Buy. Out of 19 analyst ratings, there are 15 Buys, one Hold, and three Sells.
The average Lululemon stock price target is $421.53, implying upside potential of 10%. Analyst price targets range from a low of $250.00 per share to a high of $531.00 per share.
The Bottom Line on LULU Stock
Moving ahead, look for Lululemon to keep building brand affinity while pursuing new innovative concepts as it aims to expand margins into a post-slowdown environment. Longer term, rivals like Alo could stand in the way. However, it could take at least a few years for a competitor to take a big bite out of Lululemon’s sales growth. It’s never too early to keep tabs on potential rivals, though!
