Is Aritzia Stock Poised to Become the Next Lululemon?

Lululemon and Aritzia are two retail companies that remain popular among shoppers in 2024. Are the two stocks a good buy?

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

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Shares of Lululemon Athletica (NASDAQ:LULU) have created massive wealth for shareholders since its initial public offering in July 2007. In the last 17 years, LULU stock has returned 2,260% to investors, crushing the broader market returns of the S&P 500 index, which has gained less than 500%.

Created with Highcharts 11.4.3Lululemon Athletica Inc. + Aritzia PriceZoom1M3M6MYTD1Y5Y10YALL15 Nov 202314 Nov 2024Zoom ▾Jan '24Mar '24May '24Jul '24Sep '24Nov '240www.fool.ca

Valued at a market cap of US$40.3 billion, Lululemon is among the most recognized retail brands globally. A key reason for Lululemon’s stellar returns is the company’s steady revenue and earnings growth. In the past decade, Lululemon has increased sales at a compounded annual growth rate of 19.5%, while earnings growth was higher at 22.8%.

However, a declaration in growth rates in recent quarters has dragged Lululemon stock lower by 35% from all-time highs, allowing you to buy the dip and benefit from outsized gains when investor sentiment improves.

Is LULU stock undervalued?

In recent months, Lululemon has wrestled with slower consumer spending, a challenging macro environment, and elevated interest rates. Moreover, according to Citi, Lululemon’s product assortment lacks cohesion and is no longer an exciting proposition for consumers.

A lack of newness across its athleisure portfolio has led to tepid sales growth for the company in the fiscal second quarter (Q2), resulting in lower revenue and earnings guidance for fiscal 2025 (ending in January).

During Lululemon’s Q2 earnings call, Chief Executive Officer (CEO) Calvin McDonald stated, “For 2025, we are fast-tracking several new styles within performance shorts, tops, and tracksuits.” He added that the company “will begin to see the benefits of these strategies over the upcoming quarters and return to our historical levels of newness no later than spring 2025.”

In Q2, Lululemon reported revenue of US$2.37 billion with adjusted earnings of US$3.15 per share, compared to estimates of US$2.4 billion and US$2.93 per share, respectively. While Lululemon’s Q2 earnings growth stood at 17% year over year, its top line grew at a far lower pace of 7%. Its same-store sales growth of 2% was well below estimates of 5.9%.

Analysts tracking LULU stock expect adjusted earnings per share to expand to US$15 in fiscal 2026, up from $12.2 in 2024. Shares of the retail heavyweight should regain momentum if the macro situation improves driving earnings growth higher.

Is Aritzia stock a good buy?

One TSX stock which can replicate Lululemon’s solid performance in the upcoming decade is Aritzia (TSX:ATZ). Compared to Lululemon, Aritzia is a much smaller company valued at a market cap of $5.2 billion. Since its initial public offering in 2016, ATZ stock has returned close to 160%. However, it also trades 23% below all-time highs.

In recent years, Aritzia has been grappling with a lack of innovative product offerings, a shift in consumer spending and falling profit margins. To offset these headwinds, Aritzia has adopted a product lifecycle management solution which streamlines and automates design workflows, while enhancing productivity.

Further, it is investing in digital marketing strategies to gain traction on social media platforms such as Instagram and TikTok, targeting the younger demographic. The retailer aims to improve gross margins by lowering warehousing costs and optimizing freight expenses while maintaining a competitive pricing strategy. Notably, it is expanding its physical presence south of the border, where it has seen steady growth.

These cost savings initiatives have already helped Aritzia to report a free cash flow of $225 million in the last 12 months, up from $185 million in fiscal 2024 (which ended in March).

Priced at 52 times trailing price to earnings, ATZ stock might seem expensive. However, it is forecast to expand earnings from $0.92 per share in fiscal 2024 to $2.44 per share in fiscal 2026. Analysts remain bullish and expect the TSX stock to gain 25% over the next 12 months.

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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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