3 things you need to know about Lululemon before buying stock

Lululemon Athletica (Lulu 0.59%) It has risen through the ranks and successfully carved a niche for itself in the competitive apparel segment. The stock has been a big winner over the past decade, up 672% (as of Dec. 12). S&P 500.

the Consumer Discretionary Stocks The recent uptick came after management reported better-than-expected earnings. Third Quarter Financial Results. However, the stock is still trading 23% below its all-time high.

You may be considering adding a position at Lululemon. But first, take the time to find out these three things.

1. It is a premium brand

Lululemon has established itself as a leader in the athleisure category, emphasizing high-quality fabrics and innovative designs, establishing itself as a premium brand in the industry. This is a key part of our strategy to differentiate ourselves from our mass market competitors. The company’s products are more expensive than those offered by the company. nikeIt helps you target more affluent demographics, for example.

The result is impressive profitability. Over the past five years, Lululemon has gross margin It recorded an incredible viewership rating of 56.9% on average. This puts it well ahead of industry heavyweight Nike, but better than consumer favorites like: apologize.

2. America’s problem

Lululemon’s international business is thriving. In the last fiscal quarter, international market sales increased 33% compared to the same period last year. Naturally, China is a huge growth engine, with sales surging 39%.

The company clearly has potential for rapid growth in China in the coming years, as it has only 138 stores in the world’s second-largest economy, compared to 373 in the United States.

However, most of the company’s business comes from the United States, which is part of the Americas region. Sales there rose just 2% in the third quarter, a figure that also includes results from Canada and Mexico. On the other hand, same-store sales decreased by 2%.

“The U.S. overall met our expectations for the third quarter,” Chief Financial Officer Meghan Frank said on the earnings call. To boost its performance in the U.S., Lululemon is focusing on “increasing penetration of seasonal new products” and “pursuing updated colors, prints and patterns to provide customers with more options,” according to CEO Calvin McDonald. I am leaving it.

The extremely competitive nature of the industry doesn’t make things easier. Management must constantly strive to understand in advance what styles, designs, and colors consumers want, as well as to determine the appropriate inventory levels to help maintain the brand image. This is always a challenge.

But over time, the business became successful. Projected fiscal 2024 revenue will be approximately $10.5 billion, up 163% from five years ago. Zooming out, growth is still a very important piece of the puzzle.

3. Capital allocation

Lululemon is a very profitable company, especially on a cash basis. During the third quarter of fiscal 2024, the company generated free cash flow of $417 million. This is money left over after a company invests in initiatives such as supply chain improvements or store development to fuel growth.

The company does not pay dividends. But management has been focused on larger businesses. Buy back shares In the most recent quarter. Over the past nine months, Lululemon has spent $1.3 billion on share buybacks, with another $1 billion recently authorized. In turn, this has helped keep the current share count more than 3% lower than it was a year ago.

Investors should appreciate this move. This is because it shows that management is adept at making sound capital allocation decisions when market conditions warrant. The stock price fell 23% after hitting an all-time high in December last year. It was likely influenced by the low valuation, and management took advantage of this to benefit shareholders.

If you have Lululemon on your watchlist, you now understand the brand’s premium status, the challenges of domestic growth, and management’s capital allocation. In my opinion, you should consider adding this stock to your portfolio right now because the positives outweigh the negatives.