Retail stocks such as Lululemon (NASDAQ:LULU) and Aritzia (TSX:ATZ) have delivered contrasting returns to shareholders in 2023. While the stock markets have staged a rebound this year, LULU stock has surged 26% in the first eight months of 2023. Comparatively, ATZ stock is down 48% year to date.
It also suggests Lululemon stock trades just 16% below all-time highs, while Aritzia is down 55% from record prices. Let’s see which retail stock between the two is a good buy at the current valuation.
The bull case for Lululemon stock
Valued at a market cap of US$51 billion, Lululemon is one of the hottest retail stocks globally. Despite a sluggish macro environment and rising costs, the company increased gross margins by 230 basis points to 58.8% in the fiscal second quarter (Q2) of 2024 (ended in July), showcasing its pricing power.
Lululemon reported revenue of US$2.20 billion and adjusted earnings of US$2.68 per share in fiscal Q2. Comparatively, analysts forecast revenue of US$2.17 billion and earnings of US$2.54 per share in the quarter.
The company attributed its stellar results to its differentiated business model, innovative portfolio of products, and a “portfolio approach to growth.” Sales in Q2 were up 20% after adjusting for currency fluctuations, while same-store sales grew 7%. Lululemon opened 10 net new stores in the last three months, bringing the total store count to 672.
Direct-to-consumer (DTC) sales accounted for 40% of total sales, while international sales were up 52% year over year. China continues to be a crucial market for Lululemon as sales in this region grew 61% year over year.
In the last six months, Lululemon reported operating cash flows of US$522.2 million, up from US$145.6 million in the last year, allowing the company to end Q2 with US$1.11 billion in cash.
Priced at 33.3 times forward earnings, Lululemon stock is forecast to grow adjusted earnings per share by 18.3% annually in the next five years.
Is ATZ stock a good buy right now?
Compared to Lululemon, Aritzia is a much smaller company, valued at $2.75 billion by market cap. ATZ stock over 20% in a single trading session in July after it reported fiscal Q1 of 2024 (ended in May) results. While sales were up 13.4% at $462.7 million, net income fell by 47% to $17.5 million in Q1.
Aritzia attributed its decelerating top-line growth and falling margins to economic pressures and the lack of new product lineups.
It now forecasts fiscal 2024 sales to range between $2.25 billion and $2.35 billion, below its previous guidance of between $2.42 billion and $2.5 billion. Aritzia also estimates gross margins to fall by 300 basis points year over year to 38.6%.
Priced at 27 times forward earnings, ATZ stock might see earnings per share narrow by 50% to $0.92 per share in fiscal 2024. Due to its recent pullback in share prices, analysts expect ATZ stock to gain 50% in the next 12 months.
The Foolish takeaway
Despite its steep multiples, I would choose Lululemon over Aritzia due to its widening profit margins, robust economic moat, consistent cash flows, and expanding presence in emerging markets such as China.
