Lululemon Stock vs. Canada Goose: Which Retailer Is a Better Buy?

Retail stocks such as Lululemon and Canada Goose trade significantly below all-time highs, making them attractive to contrarian investors.

Aditya Raghunath

Aditya Raghunath joined the Motley Fool Canada team in 2019 and has close to seven years of experience in covering publicly-listed companies. With a post-graduate degree in finance, Aditya aims to educate and engage Canadians by writing extensively about growth, dividend, and value stocks. If you are considering investing in the stock market, he recommends reading The Intelligent Investor by Benjamin Graham before taking the plunge.

Published April 3, 2024 3:45 pm EDT

Lululemon Athletica (NASDAQ: LULU) and Canada Goose (TSX: GOOS) investors have experienced contrasting fortunes on the stock market. Lululemon went public in July 2007 and has since returned 2,600% to shareholders. Comparatively, Canada Goose stock has slumped over 30% since its IPO (initial public offering) in March 2017.

Let’s see which retail stock is a better buy right now.

Is Lululemon stock overvalued?

Valued at US$48 billion by market cap, Lululemon stock trades 26% below its all-time highs, despite its monstrous returns. The retail giant saw share prices pull back by almost 16% in a single trading session following its results for the fourth quarter (Q4) of fiscal 2023 (ended in January).

While Lululemon surpassed revenue and earnings estimates for Q4, its guidance was lighter than expected, driving share prices lower. The athleisure company attributed lower consumer spending on apparel and other discretionary products, as well as a challenging macro environment, to its tepid outlook in Q1.

Lululemon grew sales by 16% year over year to US$3.2 billion in fiscal Q4, while adjusted earnings rose 20% to US$5.29 per share. Comparatively, analysts forecast revenue at US$3.19 billion with earnings per share (EPS) of US$5 in the January quarter.

The company’s top-line growth was driven by a 12% increase in comparable sales and new store openings. Lululemon opened 25 net new stores in Q4, ending the year with 711 stores.

While e-commerce sales grew by 17%, revenue from international markets grew by 54%, primarily due to a 78% growth in China. Comparatively, sales from North America rose by 9% year over year.

Expanding profit margins allowed Lululemon to more than double operating cash flows to US$2.3 billion. It ended fiscal 2023 with a cash balance of US$2.2 billion, up from US$1.2 billion in 2022.

Lululemon has strong brand recognition, enabling the company to benefit from pricing power and other competitive moats. Its widely growing community has meant that Lululemon’s membership program now has 17 million members. The program offers existing members early access to products and exclusive events, resulting in higher engagement rates and repeat purchases.

Priced at 19.7 times forward earnings, LULU stock is really cheap and trades at a discount of over 25% to consensus price target estimates.

What is the target price for GOOS stock?

Valued at US$1.12 billion by market cap, Canada Goose increased sales by 6% year over year to US$609.9 million in fiscal Q3 of 2024 (ended in March). Direct-to-customer revenue rose 14% to US$514 million due to the growth of in-store retail sales, accounting for 84% of total revenue. However, lower online sales meant DTC comparable sales were up just 1.6% year over year in Q3.

Canada Goose emphasized wholesale revenue was down 28% due to a planned lower order book value and streamlining of wholesale partnerships. Alternatively, revenue rose by 62% in Asia Pacific due to higher sales across channels. This growth was offset by a 26% decline in Europe and a 14% fall in North America.

Priced at 14.8 times forward earnings, GOOS stock is cheap and trades at trades at a discount of 9% to consensus target estimates.