Shares of athleisure top dog Lululemon (NASDAQ:LULU) recently fell into correction territory, falling by over 10% (11% to be exact) and going into downward dog pose after briefly hitting a new high of $516+. As one of the most resilient players in apparel with the means to expand into new product categories (think footwear), LULU is shaping up to be a great buy on the dip, in my view.
Despite the recent dip, shares still sport a premium price tag (58 times trailing earnings, well above the apparel retail industry average of 29.64 times) that some of the most value-conscious investors may find difficult to get behind. As the old saying goes, though, you’ve got to pay up for quality.
With an 11% discount now applied to shares, the question is whether the current entry point is modest enough to put new money to work. As a bull on Lululemon’s long-term growth story, I’d argue that even a modest 11% dip is worth getting behind, as the company has shown time and time again that it’s more than just another apparel retailer.
Not only has Lululemon excelled in the direct-to-consumer (DTC) and social media-based marketing fields — something I described in greater depth in a previous piece covering Nike (NYSE:NKE) stock — but the company has continued to be a sought-after brand amid recent macro turbulence.
Lululemon Has Thrived in This Mixed Consumer Environment
How could it be that the average consumer is pressured to “trade down” to low-cost generics at the grocery but not at the local Lululemon clothing rack? And why is it that the consumer is so easily able to spend more than $100 on a pair of yoga leggings but not an extra few dollars on a meal over at the local fast-food joint?
The answer is simple. The average consumer seems to be comprised of two different types of consumers at the extreme ends of the spectrum: the more affluent consumer, with more than enough disposable income to splurge on high-end discretionary goods, and an inflation-hit consumer who’s struggling to keep up with the costs of living.
Mad Money host Jim Cramer put it best in one of his recent shows, there’s a “bifurcated consumer” that exists out there right now. And that’s making it a tad confusing to digest what’s been going on in the discretionary retail scene of late.
Some reasonably priced, high-value apparel retailers have been lukewarm while their higher-end counterparts have been steaming hot. The bifurcation has been a major boon for Lululemon of late. And while Lululemon is far from a luxury good, it’s certainly the closest thing to it in the world of yoga wear, at least in my humble opinion.
At this juncture, I don’t even think it’s fair to refer to Lululemon attire as just yoga or gym clothes. Depending on where you live, Lululemon clothing is still commonplace in an era where the athleisure “trend” does not seem to be going anywhere. In fact, it may be more than just a trend.
Lululemon clothing (and the patented tech that powers it) seems to be more than worth the premium compared to more generic alternatives. Perhaps it’s the innovation, style, or functionality that leads many to go for Lululemon over all else, or perhaps it’s the logo and brand power.
Either way, it will be interesting to see how Lululemon leverages its impressive brand in the realm of footwear and other categories.
Lululemon’s Men’s Footwear Could Hit. If So, the 11% Dip May be Generous
The company recently pulled the curtain on something I once thought it would never create — a line of men’s footwear. The yoga-wear maker has typically tailored to women but has begun to find greater success with men, opening up a new total addressable market. Additionally, Lululemon is a relative newcomer in the footwear game, a market that can be tough to find good footing in.
Only time will tell if men will buy Lulu’s new kicks. If they’re comfortable, stylish, and proudly sport the Lululemon logo, my guess is they’ll be a hit. I’ve underestimated Lululemon’s brand power before, but not this time. Not as the firm hits two relatively untapped, high-growth markets (men’s wear and footwear) with one new product.
Undoubtedly, Nike (NYSE:NKE) was the go-to brand in the apparel scene for many decades. Arguably, it still is for many consumers, especially in the corner of footwear, a market Nike continues to dominate. But have the times changed such that the timeless Nike swoosh has lost its appeal with some of its more “splurgy” consumers who want to try something new while making a statement with something that’s more of a status symbol?
Perhaps. Nike products are not cheap, but their apparel (perhaps with the exception of their high-end sneakers), on average, doesn’t seem nearly as expensive as the likes of Lululemon.
Is LULU Stock a Buy, According to Analysts?
On TipRanks, LULU stock comes in as a Moderate Buy. Out of 28 analyst ratings, there are 21 Buys, five Holds, and two Sell recommendations. The average LULU stock price target is $513.22, implying upside potential of 11.8%. Analyst price targets range from a low of $300.00 per share to a high of $610.00 per share.
The Bottom Line
Perhaps we could be witnessing the “Veblen good” phenomenon first-hand, where higher prices power higher demand in an environment where the one “type” of a consumer is inclined to seek more status with the priciest (or trendiest) offering of any given product category.
In any case, it will be interesting to see where Lululemon goes from here as it looks to take risks to keep growing. The 11% correction in the stock appears to be a great entry point so as long as you believe the firm can grow into its high multiple and claw more market share from apparel rivals.
