Could Lululemon Help You Become a Millionaire?

The main objective of investing in the stock market is to raise your purchasing power over time at a much faster clip than the rate of inflation. This is a more complex way of saying that people want to become rich from the stocks that they own.

In the past five years, shares of Lululemon (LULU -1.72%) have risen by only 54%, a huge disappointment when compared to the triple-digit total returns of both the S&P 500 and Nasdaq Composite Index during the same time. Perhaps things will start to turn around for the better.

Could this beaten-down apparel stock one day make you a millionaire?

Lululemon is a quality business

What makes Lululemon stand out in the industry is its strong brand presence. The company’s products carry premium price tags that consumers have shown a willingness to pay up for. This is exemplified by the company’s superb trailing five-year average gross margin of 56.5%, which is significantly higher than its bigger competitor, Nike.

Unlike its peers that rely on retail partners, Lululemon mainly sells its merchandise via its footprint of 711 stores and through its website. This allows management to control merchandise, inventory, and pricing, a move that protects margins. Lululemon doesn’t engage in promotional activity to the extent that its competitors do.

The company’s financial performance over the years is nothing short of spectacular. Between fiscal 2013 and fiscal 2023 (ended Jan. 28), Lululemon’s revenue increased at a compound annual rate of 19.7%, as sales went from under $1.6 billion to over $9.6 billion during that stretch. Consistent gains like this aren’t typical of a clothing enterprise.

Additionally, Lululemon’s profitability is unmatched. Its operating margin came in at 19.6% in the latest fiscal quarter (Q1 2024, which ended April 28). By having proven pricing power, that margin has remained relatively consistent over the years.

One other key reason that investors should know that points to Lululemon being a quality business is its growth potential. Historical growth has been remarkable, but the future looks bright, too. Management made it a goal to double sales in the five years after fiscal 2021, hoping to get to $12.5 billion in revenue by fiscal 2026. It’s safe to say that Lululemon is on track to hit this target.

Besides doubling men’s and digital sales, a top priority is to gain a stronger footing internationally. In fiscal 2023, 79% of Lululemon’s revenue was derived in the U.S. and Canada. That’s not surprising, given that North America is the company’s home market.

However, this means that there is a gigantic opportunity to further penetrate China, for example, where Lululemon currently has 127 company-operated stores. The Asian nation made up just 10% of Lululemon’s overall revenue last fiscal year. But the country’s burgeoning middle class, as well as Nike’s presence there, present a clear roadmap for long-term success.

Is it time to buy Lululemon stock?

It’s hard for anyone to deny that Lululemon is a solid business, but I believe the bears will point to the apparel industry’s structure as a major headwind. Barriers to entry are nonexistent, as anyone can create and start selling their own clothing. Competition is fierce from both larger rivals and younger upstarts. Plus, management must always try to figure out where consumer tastes are going to go, which seems like a daunting task.

Even with these negative attributes, Lululemon looks like a smart stock to buy right now. Besides its strong brand, impressive financial performance, and growth potential, the current valuation is incredibly attractive. Shares trade at a price-to-earnings ratio of 23.5, which is close to the cheapest they have sold for in the past decade.

Investors who can put down more capital, while also extending their time horizons, are in the best position to become millionaires from owning Lululemon stock.