Financial Pros Love Yoga Pants

[View in browser]( [The Spill Logo] Proprietary Data Insights Financial Pros’ Top Apparel Stock Searches in the Last Month Rank Ticker Name Searches #1 [LULU]( Lululemon Athletica 93 #2 [TJX]( TJX Companies 41 #3 [AEO]( American Eagle Outfitters 36 #4 [ROST]( Ross Stores 29 #5 [ANF]( Abercrombie & Fitch Company 19 #ad [Q3’s Top 10 Trending Stocks]( Brought to you by [The Alt]( [Are Alternative Investments a gray area? The Alt can add some color]( [The Alt - Are Alternative Investments a gray area? The Alt can add some color]( The most profitable investors stay informed and up to date. Stay on top of Alternative Investment trends with credible articles and videos directly to your inbox with our hand-curated newsletter The Alt. [Subscribe now](. The Fashion Retailer Defying the Odds Brick-and-mortar stores are dying a slow death. Apparel stores, once a staple of mall hangouts, are proverbial ghost towns. Yet, Lululemon Athletica (LULU) manages to drop double-digit revenue growth year after year. And they show no signs of slowing down. Financial pros picked up on this stock after its Q3 earnings call delivered exactly what investors wanted to hear. But with the stock approaching all-time highs, and a stretched valuation, is there still an opportunity to own the company that made yoga pants a thing? Lululemon’s Business Lululemon Athletica stands out as a formidable contender in the realm of athletic apparel. Founded in Vancouver, Canada, in 1998, the company carved out a niche with its technical apparel suited for yoga, running, training, and other sweat-inducing activities. Today, its fitness lifestyle brand includes a broad range of athletic wear, apparel, accessories, and footwear, serving both men and women. Revenues are broken down by channel: - Company-Owned Stores (54% of revenues) - Direct to Consumer (42% of revenues) - Other (4% of revenues) Sales can also be broken down by region: - U.S. (65% of revenues) - Canada (13% of revenues) - China (12% of revenues) - Other (10% of revenues) Management introduced its Power of Three x2 growth plan, focusing on product innovation, guest experience, and market expansion. The strategy blends international expansion, digital and physical retail investment, and continuous product innovation across key categories, all of which they directly addressed in their Q3 2023 infographic: [Q3 Earnings] [Source: LULU Website]( Financials [Financials] Source: Stock Analysis While most clothing retailers are barely holding on, Lululemon is growing like a tech startup. Revenues have yet to dip below 10% at any point in the last decade. And their last numbers pushed upwards to 30%, some of their best growth ever. At the same time, the company’s online expansion continues to improve margins, offsetting some inflationary pressures. Nonetheless, the +14% free cash flow rate is one of the highest in the industry. And with practically no debt, all that cash gets plowed back into the business or used to repurchase shares, yielding roughly 2% annually. Valuation [Valuation] Source: Seeking Alpha Lululemon’s growth makes it one of the most expensive apparel stocks on the market. Discount retailers like TJ Maxx (TJX) and Ross Stores (ROST) trade at half the P/E and price-to-cash ratio of Lululemon, while traditional apparel companies like American Eagle Outfitters (AEO) and Abercrombie & Fitch (ANF) trade at anywhere from a quarter to a third the price of Lululemon using those same measures. Growth [Growth] Source: Seeking Alpha The difference in premium all boils down to growth. Lululemon’s average revenue growth ranges from 25%-30%. TJ Maxx and Ross Stores are half that, while American Eagle and Abercrombie hover around 10% average annual growth. While Lululemon’s EBIT and free cash flow growth, though excellent, aren’t at the top of this group, you need to remember that many of these retailers are coming back from the brink of bankruptcy. Profitability [Profit] Source: Seeking Alpha We were surprised to see Abercrombie put up better gross margins than Lululemon. However, Abercrombie can’t translate that to bottom-line success the way Lululemon can. It is worth noting that discount retailers delivered higher returns on equity this year. While that’s not a trend, it could imply a better outlook for retailers in 2024. Our Opinion 6/10 Lululemon is a fabulous company with a well-laid-out strategic vision. That’s also why the stock is expensive. We only rated it a 6/10 because of the price. If this were October, we’d be all over it at $400 a share. For now, it’s one to put on your watchlist for a pullback. 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