Better Buy: Aritzia Stock or Lululemon?

Retail stocks such as Aritzia and Lululemon have delivered contrasting returns to investors in 2023. Which is a better stock to buy today?

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Women's fashion boutique Aritzia is a top stock to buy in September 2022.

Source: Getty Images

Canadian companies such as Aritzia (TSX:ATZ) and Lululemon Athletica (NASDAQ:LULU) are part of the retail sector. While the two retail entities compete in similar niches, both have experienced contrasting trends in share prices this year. While ATZ stock is down 49%, shares of Lululemon have surged 19% year to date.

Let’s see which of the two stocks is a better buy right now.

The bull case for Aritzia stock

Valued at a market cap of $2.67 billion, Aritzia stock is down 60% from all-time highs, allowing you to buy the dip. Last month, Aritzia announced its results for the fiscal first quarter (Q1) of 2024 (ended in May) and reported revenue of $463 million, an increase of 13% year over year. However, top-line growth declined significantly, given it rose 65% in the year-ago period.

The U.S. remains a key driver for Aritzia, as sales were up 22% south of the border, accounting for 54.4% of total sales. Its active client base in the U.S. has almost doubled in the last two years, allowing the company to gain significant traction in the world’s largest economy.

However, its narrowing profit margins amid elevated inflation levels are a cause for concern. For instance, its gross margins fell to 38.9% from 44.3% in the year-ago period. Its net income also fell by 47.5% to $17.5 million in the May quarter.

Aritzia plans to open eight new boutiques and reposition or expand four other outlets in the U.S. this year. Six of the eight new boutiques will open in the second half of the fiscal year, allowing Aritzia to end 2024 with sales of $2.3 billion, an increase of 4.3% compared to 2023. However, its adjusted earnings per share are forecast to fall to $0.92 from $1.86 in this period.

Priced at 26 times forward earnings, ATZ stock is not too expensive, given its earnings might double to $1.89 per share in fiscal 2025.

Analysts tracking Aritzia stock remain bullish and expect shares to surge 50% in the next 12 months.

The bull case for Lululemon stock

Lululemon is a much bigger company, valued at US$48.8 billion by market cap. It reported sales of US$8.1 billion in fiscal 2023 (ended in January), indicating revenue surged by 26.5% annually in the last three years, despite the COVID-19 pandemic, supply chain disruptions, inflation, higher interest rates, and a sluggish economy.

Its stellar growth continued in fiscal 2024, as sales rose 24% to US$2 billion in Q1. Adjusted earnings grew 54% to US$2.28 per share, easily surpassing consensus estimates.

Lululemon forecasts sales to touch US$12.5 billion by fiscal 2026, and at the current price-to-sales multiple, shares might surge around 50% in the next two years.

While the U.S. accounts for 65% of total sales for the company, its revenue grew by a stellar 80% in China in Q1. International markets remain a key revenue driver for Lululemon in the upcoming decade.

Due to its strong brand appeal, Lululemon enjoys a significant competitive advantage. It has managed to maintain gross margins of over 55% in the last five years, despite multiple headwinds. Online sales now account for 42% of total revenue, which is another driver of profit margins.

The Foolish takeaway

While Aritzia stock is cheaper than Lululemon, it is also a riskier investment. Lululemon enjoys a wider economic moat and higher profit margins, allowing it to deliver consistent cash flows across market cycles.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Aritzia. The Motley Fool recommends Lululemon Athletica. The Motley Fool has a disclosure policy.

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