1. Lululemon Athletica Inc. (NASDAQ:LULU)
Upside from Current Levels: 39%
Founded in 1988, Lululemon (NASDAQ:LULU) is an athletic apparel, footwear, and accessories brand with around 38,000 employees. It sells leisure-athletic wear and accessories such as socks, bags, and yoga mats that people can use when engaging in fitness activities. Earlier this year, Lululemon (NASDAQ:LULU) released its first-ever men’s collection, expanding its sales to a whole new avenue. Its new casual and innovative performance footwear also made a debut for the spring and summer 2024 season. Headquartered in Canada, the company partnered with the Canadian Olympic Committee (COC) and the Canadian Paralympic Committee (CPC) to launch its first-ever summer Athlete Kit for the Canadian Team ahead of the 2024 Paris Olympic and Paralympic Games. This is Lululemon (NASDAQ:LULU)’s second time acting as the Official Outfitter of the Canadian Team in a multi-year partnership with CPC and COC.
Is Lululemon (NASDAQ:LULU) a good investment? In Q1, the company’s revenue grew 10% year over year to $2.2 billion, and its comparable sales grew by 6%. However, demand in North America disappointed investors, increasing by only 3% as compared to a 17% growth in Q1 2023. Calvin McDonald, Lululemon’s CEO, attributed the underperformance to an “overly narrow color assortment” in its products, along with a shortage of adequate product sizes that led customers to believe that their desired items were always out of stock. However, the company expects to work on these errors in Q2, and has significant potential to grow.
There are several reasons for this optimism, the foremost being the company’s steady growth over the past years. Lululemon (NASDAQ:LULU)’s revenue jumped from $4 billion to $9.6 billion between FY2019 and FY2023, undergoing a more than double increase. Its net income also grew at a CAGR of 24.5%, from $646 million in 2023 to $1.55 billion in 2024. These reasons give the stock the first spot on our list of the best clothing stocks to buy.
The company’s “The Power of Three x2” strategic goals set in 2022 as a follow-up to the original plan set in 2019 has allowed Lululemon (NASDAQ:LULU) to drive growth by focusing attention on its three pillars: product innovation, guest experience, and market expansion. Overall, the stock sports a consensus Buy rating among analysts, and its median price target implies an upside of 39% from current levels.
Middle Coast Investing stated the following regarding Lululemon Athletica Inc. (NASDAQ:LULU) in its Q2 2024 investor letter:
“I mentioned last quarter and higher above that I like buying quality stocks on sale. Lululemon Athletica Inc. (NASDAQ:LULU), the 2nd worst performer in the S&P 500 this year, qualifies. I published a full thesis on the stock before its most recent earnings, but the basics: the yoga pants and clothing company has had an amazing post pandemic run that is approaching its end. Its growth in the U.S. is slow/non-existent at the moment, but it is growing very fast in China and Europe. I think that international growth is likely to endure, and that its U.S. slowness is likely to be temporary. Lululemon shares are not ‘cheap’, but they are on sale for an average price, and I think the company will grow faster than average over the next five years. I would be wrong if Lululemon is a fad gone bust, or faces a huge post-pandemic hangover as people get used to leaving the house more. We’ll see.”
The company has expanded from one store in Vancouver to nearly 711 stores across the globe, and thus holds sufficient potential to grow into a globally dominant brand. Lululemon (NASDAQ:LULU) expects the net revenue for 2024 to exceed $10 billion, undergoing a growth of between 11%-12%. 45 hedge funds hold stakes worth $10.62 billion in Lululemon as of Q2 2024.
While we acknowledge the potential of Lululemon (NASDAQ:LULU) to grow, our conviction lies in the belief that 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 more promising than NVIDIA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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